Westpac leads retail bank response to Reserve Bank move

1.00pm

In a rapid response to yesterday's Reserve Bank (RB) hike in the Official Cash Rate, Westpac Bank lifted its base lending rate.

It lifted the rate by 0.35 percentage points to 8.1 per cent following the RB's move to raise the Official Cash Rate by a quarter of a per cent to 5.75 per cent.

On a $150,000, 25-year mortgage, Westpac's rise will cost a borrower $34.60 a month.

RB Governor Alan Bollard signalled that yesterday's rate rise would be the first of three this year. That means borrowers can expect floating base rates to rise to 8.5 per cent.

Westpac spokesman Paul Gregory said 90-day bank bills in the wholesale market, from where most banks obtain funds to on-lend to customers, hit 6.03 per cent yesterday, up from 5.5-5.6 per cent when Westpac last hiked its base rate.

"Westpac has chosen to pass on some of that increase to customers," Mr Gregory said in a statement.

"The HBR (the housing base rate) change is accompanied by increases in fixed housing lending and term deposit and call/savings rates," he said.

Other banks are expected to follow Westpac's lead over the next week or two.

Dr Bollard's surprisingly tough Monetary Policy Statement yesterday has already had ramifications for the New Zealand dollar.

The kiwi leapt more than one cent to nearly 91 cents against the Australian dollar -- up nearly 6 per cent in under a month and its highest level since April last year.

It was also strong against the US dollar, rising to US63.3 cents compared to US61.7 cent just before Dr Bollard made his announcement.

ANZ Investment Bank chief foreign exchange dealer Murray Hindley said the kiwi's move higher yesterday continued during last night's offshore session, particularly on the aussie cross.

He said overseas investors were attracted by the high interest rates offered in New Zealand -- the highest in the developed world.

Mr Hindley said with Dr Bollard saying further rate hikes were to come, "I can only imagine that cross could push to A91.50c to A92c".

Council of Trade Unions economist Peter Conway acknowledged there was likely to be a spike in inflation, but he said Dr Bollard should have overlooked that and left interest rates unchanged.

The debate was whether the things slowing the economy outweighed those that were moving it along, he told National Radio.

"It will self-correct. You will do damage by putting interest rates up."

"If we are out kilter (on interest rates), we do attract speculation on the New Zealand dollar which damages exports. That is a concern there."

"There is no doubt there are some inflationary pressures but on balance we'd say 'no, there was no need to do it because that self-correction will be there and we will have a slight blip in inflation'.

"We would not like to see a further move."

Dr Bollard justified the projected series of rate rises on the bank's forecast for inflation.

The Consumer Price Index is forecast to rise above 3 per cent early next year and stay there for about a year.

While that means inflation will be outside the bank's target to keep it in a 1-3 per cent band, Dr Bollard said the bank was only required to keep it within the band "over the medium-term".

So despite forecasting economic growth to halve over the next two years from the current 3.5 per cent rate, Dr Bollard said he was determined to stomp on inflation before expectations became embedded. Hence the move on interest rates.

"We are not raising interest rates to slow down growth, we are raising interest rates to cut back on inflation," he told a parliamentary committee yesterday.

- NZPA