Bollard hints at even higher rates

By BRIAN FALLOW

Reserve Bank Governor Alan Bollard tightened the screws on borrowers again yesterday and all but promised more of the same to come.

He raised the official cash rate from 6 per cent to 6.25 per cent, which will push floating mortgage rates up from 8.25 per cent now to 8.5 per cent.

It is the fifth time he has increased rates this year.

He added that "further tightening" was likely to be required, a very strong signal that he will raise interest rates again next month.

Some banks, including Westpac and the Bank of New Zealand, have interpreted the economic forecasts the Reserve Bank released yesterday to indicate that another rise still, in December, is more likely than not.

That would push floating mortgage rates to 9 per cent and would mean that the cost of servicing a $100,000 loan had risen $1750 a year, or $34 a week, since January.

The latest rise means New Zealand interest rates are the highest for any developed country and a full percentage point above Australia's.

"New Zealanders have a strong taste for borrowing and seem to require quite high rates to keep that moderating," Dr Bollard said.

So far many borrowers have not felt the effects of the interest rate hikes Dr Bollard has delivered already. More than two-thirds of mortgage debt is at fixed rates, although most of that is only for one- or two-year terms. The rates for new fixed-rate loans have risen, but not as much a floating rates.

Dr Bollard said he was confident his rate rises would work even if that took slightly longer than in the past.

The Reserve Bank expects house prices, which have risen strongly over the past two years, to level off and even fall next year. But that would not dent our love affair with housing.


"If we have got a house and we have paid it off, we like to do additions and alterations. If we have done our additions and alterations we want to get a bach," Dr Bollard said.

"If we have got a bach and have some extra money I'm afraid that some people think the sensible thing is to put it into investor housing - and that does not lead to broadly balanced household balance sheets."

Economic growth has been stronger for longer than he expected and although it is forecast to slow from here, Dr Bollard fears the resulting pent-up inflation pressures will get worse before they get better.