Reserve Bank Governor Alan Bollard today denied the booming property market provided the impetus for yesterday's surprise rate hike, saying instead it was part of the bank's "normal" requirement to control inflation.
In notes for a speech he delivered to the Canterbury Employers' Chamber of Commerce today, Dr Bollard said the current run up in house prices was not so extreme that it warranted "an extraordinary response".
Instead, he said yesterday's 0.25 per cent official cash rate hike to 5.25 per cent was, "just part of the normal operation of monetary policy to ensure continuing consumer price stability".
However, Dr Bollard did not rule out adjusting monetary policy "to constrain extreme asset price bubbles".
"The fallout from the build-up and bursting of very large asset price bubbles warrants taking some risks in an attempt to moderate the problem."
He said that in a rare situation, "seeking to stabilise rising house prices or an overheated stock market might mean having to force inflation lower than otherwise would be required. It might also mean greater variability in the real economy, interest rates and, potentially, the exchange rate".
In a situation where the bank acted to avoid asset price bubbles, "I would expect many audiences would say that the bank was unnecessarily squeezing growth from the economy", Dr Bollard said.
Dr Bollard has faced criticism from exporters, business groups and unions dismayed by yesterday's rate rise, which sent the kiwi charging upward after it had earlier slumped on news the US central bank may raise its own interest rate earlier than expected.
Yesterday's rate rise also helped knock 1.4 per cent from the sharemarket's benchmark indices.
Business groups and exporters criticised the central bank's decision, saying they now expected the dollar to rise further.
Carter Holt Harvey chief executive Peter Springford said he was surprised by the rate hike. The strong dollar was already beginning to put the brakes on the economy, even if it was not yet visible.
The rise would underpin the dollar and make the already tough conditions "more challenging".
"We have not yet seen the effect of the dollar on export markets," he said. "We feel that (monetary policy) is being aligned to the domestic markets rather than export markets."
Employers and Manufacturers Association chief Alasdair Thompson said the rate increase would push up the dollar, making life for exporters tougher. But the central bank seemed to be overstating the economic growth prospects and inflation pressures, especially in housing and wages, had been steady.
National's deputy finance spokesman, John Key, said the rate increase would see the dollar rise not just against the US dollar, but also the other cross rates in the light of recent European decision to hold their rates.
Council of Trade Unions economist Peter Conway said Dr Bollard's move was not justified, because the housing market was starting to slow already and wage inflation was low.
A labour and skill shortage could lead to wage inflation in theory, but that had not been clear across the board, Mr Conway said. Wages rose for building workers, but it was not spreading, with little sign of high real wage rises.
- NZPA
Rate hike not prompted by housing boom says Bollard
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