Interest rate rise slated

Business leaders have criticised the decision to raise interest rates today to 7 per cent.


Reserve Bank governor Alan Bollard made the announcement of a rise in the official cash rate (OCR) from 6.75 per cent this morning, again warning that consumer spending was overheated.


However, Business Roundtable chief executive Roger Kerr said the move should have been taken earlier and would have little impact now.


He told Newstalk ZB: "Raising interest rates now at this point in the business or eceonomic cycle is going to have no impact on the current inflation rate he has a problem with, and it is certainly, in our view, going to have no impact on the future inflation rate."


Cameron Brewer, head of the Newmarket Business Association, also attacked Dr Bollard, saying consumers and small to medium-sized businesses should not bear the brunt of higher rates.


He said: "Mr Bollard should first be trying to curb Government spending that, along with petrol prices has driven inflation to 3.4 per cent.


"Instead, there will be a rise in the OCR for the eighth time in as many quarters. This will immediately hit many businesses in the productive sector reliant on floating loans, with interest soon to near 10 per cent."


Dr Bollard earlier said the move was a reaction to continuing high inflation risks in the medium-term.

He said the "persistently buoyant" housing market, higher oil prices and increased Government spending - following pledges during the election campaign - were all a concern.

Dr Bollard added: "While there has been a noticeable slowing in economic activity, and a particular weakening in the export sector, we have seen ongoing momentum in domestic demand and persistently tight capacity constraints.

"Hence, we remain concerned that inflation pressures are not abating sufficiently to achieve our medium term target, prompting us to raise the OCR today."

The most serious risk to medium-term inflation was the continuing strength of household spending, he said. This was supported by a relentless housing market and rapid growth in mortgage lending.

The failure to save was showing through in the country's worsening current account deficit, which now stood at 8 per cent of GDP.

Dr Bollard repeated a stark warning he made in a speech in Rotorua earlier in the month, saying: "Borrowers and lenders alike need to recognise that the current rate of debt accumulation is unsustainable.

"The correction of these imbalances and associated inflation pressures will require a slowdown in housing, credit growth and domestic spending. We also expect a significantly lower exchange rate. The longer these adjustments in behaviour and asset prices are deferred, the more disruptive they are likely to be."

Deutsche Bank economist Darren Gibbs said Dr Bollard's themes were very much in line with his Rotorua speech.

"He's telling us to watch the housing data and watch the retail data. "If we don't observe some weakness there then we're going to see even higher rates, and I don't expect to see any weakness, so I'm still thinking we're going to see a cash rate of 7.25 per cent come December 8."

UBS economist Robin Clements that "at the margin the market had probably worked itself into a frenzy about what might happen with the rumours of 50 basis points.

"They've still got the commentary, the threats there about more to come, so certainly a risk that there might be another hike to come."

Dr Bollard said today's increase in the OCR, combined with higher world interest rates and knock-on effects from the raising of fixed rate mortgages were expected to slow the housing market and household spending over the coming months.

But, indicating further rises may follow, he said: "The prospect of further tightening may only be ruled out once a noticeable moderation in housing and consumer spending is observed.

"Certainly, we see no prospect of an easing in the foreseeable future if inflation is to be kept within the 1 per cent to 3 per cent target range on average over the medium term."

- HERALD ONLINE STAFF, NZPA, NEWSTALK ZB