Thousands must take Dr Bollard's medicine

Reserve Bank Governor Alan Bollard left the official interest rate on hold yesterday, but the delayed effect of previous rate increases will still bite around 300,000 home-owners this year as their fixed-rate loans come up for renewal.

Leaving the official cash rate at 7.25 per cent, Dr Bollard said he did not expect to have to raise it again, though that could not be ruled out.

With the economy slowing to a crawl, some economists have tipped the bank to start cutting interest rates by the middle of the year. Others, focusing on inflation, think it will be touch and go to see a cut before the end of the year. Most are looking to September or October for the loosening of the screws to start.

But people with fixed-rate mortgages maturing in the course of this year are likely to face a hefty increase in their mortgage bills, regardless of what Dr Bollard does to the official cash rate.

Over $36 billion of home loans, representing 41 per cent of fixed-rate loans and 31 per cent of all mortgage debt, matures this year.

Inflation, at 3.2 per cent, is outside the 1 per cent to 3 per cent band that Dr Bollard is required to keep it in on average over the medium term. The bank's current forecasts expect it to stay near 3 per cent over the next couple of years.

"Continuing increases in wages, energy prices and other business costs suggest inflation pressures will not subside quickly," he said.

Borrowers' preference for fixed-rate loans has largely insulated them from the nine official cash rate increases Dr Bollard has delivered over the past two years. The brunt of those rises has been borne by businesses, through higher interest rates on their borrowing and the impact of a high exchange rate as foreign savers convert their yen or euros to kiwi dollars to take advantage of the high interest rates on offer in New Zealand.

Dr Bollard yesterday acknowledged the slowdown in the economy due to the impact of the exchange rate on exports and firms competing with imports, and the fall in construction activity.

But he had yet to see hard evidence of a slowdown in domestic demand, which is mainly consumer spending brought on by more jobs, higher wages and increased value in houses.

Until there was clear evidence of a sustained weakening in domestic demand the possibility of another rise in the official cash rate could not be ruled out, Dr Bollard said. 


The numbers

* 7.27pc The average rate of mortgages with less than 12 months to run held by thousands of homeowners.
* 8.15pc The rate charged by most banks now for a two-year term.
* $23 The additional amount homeowners with a $100,000 loan will need to pay each week.