Mortgage rate climb likely

By BRIAN FALLOW economics editor

Another round of mortgage rate rises is on the cards after Reserve Bank Governor Alan Bollard pushed up wholesale interest rates yesterday and warned of further increases to come.

As expected, Dr Bollard raised the official cash rate from 5.5 to 5.75 per cent but in a stern accompanying statement he has pencilled in another half a percentage point beyond that, which would push floating mortgage rates to around 8.5 per cent.

Many economists think that warning shot goes too far.

"The housing market has plateaued," said Westpac chief economist Brendan O'Donovan. "Sentiment has changed and the market will adjust of its own accord. It didn't need this additional kick in the guts."

Westpac is raising its floating mortgage rate from 7.75 to 8.1 per cent.

Dr Bollard is tightening the screws even though he expects economic growth to slow, from 3.5 per cent now to a low of 1.75 per cent by early 2006. His problem is that the pent-up inflation pressures after three years of strong growth are no longer being offset by a high dollar.

Inflation is expected to climb above 3 per cent by early next year and stay there for a year or so.

Dr Bollard has to ensure that inflation does not take hold at that level, for example through higher wage settlements.

As he acknowledges, there are early signs the heat is coming out of the housing market - fewer houses are selling, they are taking longer to sell and although prices are still rising they are rising more slowly than they were.

"But there is still a lot of activity in there and that activity also means households are spending quite freely, despite the fact that debt levels are increasing."

Asked why New Zealand had to have the highest interest rates in the developed world he said, "New Zealanders [have] always been very keen to take on debt and keep spending and one has to get up to higher rates in order to regulate that, compared with some countries."