Mortgage rates follow bank rise

Mortgage rates are already climbing after the Reserve Bank yesterday turned the screws on interest rates.

Exporters, homeowners with mortgages and businesses will all feel the impact of the move but savers will earn more from investments.

The New Zealand dollar, already at historically high levels, climbed above US74c after bank Governor Alan Bollard lifted the official cash rate from 6.5 to 6.75 per cent.

The move is likely to push floating mortgage rates up by $5 a week for a $100,000 loan.

Westpac announced a 0.25 per cent increase in its floating rate to 9.05 per cent, effective from Monday for new customers and April 4 for existing customers. Other banks are expected to follow suit.

But part of Dr Bollard's problem is that about three-quarters of home loans by value are fixed and have been insulated from the six interest rate rises he ordered last year.

Westpac estimates more than half of the impact of last year's rate rises have yet to be felt by borrowers.

Likewise, many exporters have yet to feel the pain of the high dollar because world prices for dairy products, beef and lamb are very high.

Others have taken out a form of currency insurance which locks them into lower exchange rates - for a while. The high dollar's effects will be felt more widely as these run out.

Employers and Manufacturers Association chief executive Alasdair Thompson said the rate rise would hit manufacturing exporters hard.

Nick King of jeweller Opal Pacific, which sells to the US and to tourists here, said the high dollar was one reason it had had to lay off staff.

Dr Bollard said he realised the high dollar was starting to hurt firms, especially those whose goods were priced in US dollars and in areas like fishing and forestry where export prices have not been good.

It was the hardest call he had had to make since becoming governor in September 2002, he said.

The bank expects the economy to slow down but not until the second half of the year. In the meantime there was no evidence that inflation pressures were abating.

The bank forecasts an inflation rate of 3 per cent, the top of its target band, through this year and next.

That makes the bank nervous that people will lose confidence in low inflation and start pushing up prices and wages across the board.

For Dr Bollard, whose statutory duty is to keep a lid on inflation, that is a greater danger than hitting the brakes on the economy harder than turns out to be necessary.

He denied the rise was a shot across the bows of unions seeking a minimum 5 per cent pay increase.

But it was important people realised inflation would be kept under control, he said.

Andrew Little, national secretary of the Engineering, Printing and Manufacturing Union, said rising interest rates would leave people with less money for essentials and would fuel the push for a pay rise.