Reserve Bank lifts interests rates for fourth time

12.00pm UPDATE

Reserve Bank Governor Alan Bollard, as universally expected, today raised the Official Cash Rate (OCR) by a quarter of a percentage point, the fourth lift in interest rates this year.

In his six-weekly review of rates, Dr Bollard made it clear that another hike at the next review on September 9 was certain.

Retail banks are likely to quickly mirror the Reserve Bank's move with mortgage rate increases.

New Zealand already has the highest interest rates in the developed world and today's 25 basis point raise takes the OCR to 6.0 per cent -- its highest level in over three years.

All economists had predicted the rise, assessing the economy has run stronger than anticipated and is running near capacity creating inflation pressures.

Dr Bollard noted there had been positive news on the export front with commodity price rises improving the incomes of exporters despite the continued strength and volatility of the New Zealand dollar.

"It appears that current economic strength may be maintained for longer than we anticipated in June and it could add to price pressures.

"Further tightening of monetary policy looks likely to be necessary," Dr Bollard said.

The rise today reflected "a continued buoyant economy that is placing considerable strain on resource capacity and hence leading to inflation pressures".

In its last full review of the economy in June, the bank warned that inflation -- running at 2.4 per cent in the year to June -- was likely to burst outside the bank's 1-3 per cent band. It forecast inflation at over 3 per cent through most of 2005.

That concern will be reinforced by news today that oil prices hit their highest levels in 21 years with US light crude up over US$43 a barrel.

Dr Bollard said the interest monetary tightening would be enacted despite signs the domestic economy is slowing.

"Overall, the domestic economy remains strong. Labour markets remain tight and productive resources are stretched.

"However, as we have projected for some time now, there are signs of a slowing in some domestic sectors."

The housing market appears to be coming off the boil with house sales slowing and the time taken to sell a house lengthening. Some easing in prices was also apparent in last month's data.

This is partly the result of a slowing in net immigration. With job markets picking up in Australia, Britain and the United States, there has been a resurgence of kiwis leaving New Zealand on a long-term basis.

Today's decision and the "hawkish" tone of Dr Bollard's statement (in line with his June statement) is likely to see the New Zealand dollar maintain its upward trend for some time.

It was trading at US62.82c shortly before the announcement and was at US63.12c shortly after.

UBS chief economist Robin Clements said the market was leaning towards the likelihood the tone would be hawkish "and it seems they've fulfilled that as well -- it may be even more hawkish than expected".

"It's certainly leaving the door well open for another hike in September... but I'm thinking the data flow will be looking somewhat softer by then so they may be in a better position to be close to saying this might be enough."

Citibank economist Annette Beacher agreed, saying the bank left no doubt a tightening bias was in place.

"In our view this sanctions the market pricing already in place, ie more than 50 per cent probability of 25 basis point raise at the September 9 Monetary Policy Statement (MPS)," she said.

The bank's acknowledgement of a slowdown in some domestic sectors was a "a softening of heart since the June MPS", she said.

"We have not changed our view: we believe there are sufficient lead indicators suggesting a cooler economy next year, easing medium-term inflationary pressures.

"We believe 6 per cent is the most likely peak in the cash rate for this cycle."

ANZ chief economist John McDermott called the statement "very hawkish" and he believed there could be two more rate rises after today's.

"It looks like they'll move again in September, and again in October, so there's a significant risk they're targeting 6.50 per cent for the cash rate."

- NZPA