Bollard puts rate hike back on table

Alan Bollard's hints of a rate rise are being seen as risk management. Picture / Mark Mitchell

The possibility of another official cash rate hike has been put back on the table by Reserve Bank Governor Alan Bollard.

But economists suspect it is a tactical move, aimed at keeping interest rates high until the bulge in fixed-rate mortgages set to mature over the next few months is out of the way.

Although Bollard kept the OCR on hold at 7.25 per cent as expected yesterday, most market economists were taken aback at how hawkish the accompanying monetary policy statement was.

"We see more inflation ahead than in earlier reviews," he said. "The outlook for monetary policy has become more finely balanced" and "we are less confident that no further policy tightening will be required in this cycle".

Wholesale interest rates rose on the announcement and the kiwi dollar jumped nearly a cent against the US dollar.

Yet the statement glossed over the fact that the exchange rate had already been significantly higher than the bank was expecting three months ago.

Bank of New Zealand economist Craig Ebert said combined with lower world crude prices, the stronger currency had seen petrol prices fall 21c or 12 per cent since early last month.

"We were also a bit surprised it didn't mention the current distress in the business sector, apart from mentioning that investment spending is turning down."

Westpac chief economist Brendan O'Donovan said: "We wonder if today's hawkish statement is, in part, designed to keep up the pressure on mortgage rates and discourage the banks from starting another mortgage war."

The Reserve Bank forecasts the effective or weighted average mortgage rate to rise above 8 per cent over the year ahead, as more than 40 per cent of fixed-rate mortgages are re-priced from their average rate of 7.5 per cent.

In particular, about $15 billion of two-year loans taken out during the "mortgage wars" in late 2004 and early 2005 are due to mature over the next few months, many of which are at rates close to or even below 7 per cent.

"The last thing they want is another mortgage war that would give the housing market a third wind," O'Donovan said.

Not enough had changed in the six weeks since the last official cash rate review to justify the change in tone in the latest statement.

"They have been spooked by the strong employment numbers and the resilience of the housing market. But there are plenty of offsetting factors. Leading indicators of the international environment have softened. Oil prices have dropped and retail sales have been weakening, even if not as fast as the bank would like. And the dollar has been far higher than they expected."

O'Donovan said there was also about a 50:50 chance of an El Nino event, which would hit agricultural production next year. "It always seems to hit when the economy is already weak."

ANZ National bank chief economist Cameron Bagrie said the Reserve Bank's growth projections - which bottom out at 1.8 per cent over this March year - were overly optimistic.

High petrol prices, increased local body rates, power and mortgage payments and tight financial conditions had yet to fully impact on consumer spending, which already buckled in the June quarter.

"The decision to put a rate hike back on the table merely looks to be a story of risk management."

ASB Bank chief economist Anthony Byett said the Reserve Bank would remain highly sensitive to the impending rollover of fixed rate home loans until January.

However, the ASB continued to hold the view that rates would not be raised again in this cycle.


The Governor's crystal ball

* Inflation stays above 3 per cent until late next year.
* Consumer spending flatlines through 2007 and 2008.
* But it's a soft landing overall, with growth bottoming out at 1.8 per cent.
* Unemployment drifts higher to 5 per cent by 2009.
* Oil prices fall back gradually to US$50.