Bollard makes rate rise last one for the year

By BRIAN FALLOW

Reserve Bank Governor Alan Bollard reckons he has done enough to slow the economy and keep inflation under control after yesterday raising interest rates for the sixth time this year.

Dr Bollard lifted the official cash rate to 6.5 per cent from 6.25 per cent, which is likely to push floating mortgage rates to about 8.75 per cent.

But he had been expected to leave the door open for another rate rise in December. Instead he said he believed he had now done enough.

One reason he gave is the dollar. The exchange rate has climbed steeply over the past couple of months, partly because New Zealand has higher interest rates than any other developed country (apart from Poland).

Like higher interest rates, a higher dollar relieves inflation pressures by slowing the economy - except that it does it by taking money out of the pockets of farmers and other exporters rather than borrowers.

Dr Bollard may have been afraid that another stern statement about the outlook for interest rates would have pushed the dollar to levels damaging to the export sector.

The other reason he gave for having done enough is that the effects of this year's interest rate rises, 1.5 percentage points in all, "still have to work their way through the economy".

Most people have barely felt the impact of higher rates. Only one home in three is owner-occupied with a mortgage, and more than 70 per cent of mortgage debt is at fixed rates, mainly for one or two-year terms.

Because of a bank home loan interest rate price war, the two- and three-year rates on offer are little different from what they were in January.

But the amount of debt has increased steeply. At the end of August households had about $90 billion of mortgage debt, up 16 per cent on a year earlier.

The Reserve Bank estimates that about a third of the borrowing for private dwellings is for rental properties. The bank noted in a report this month that rents had not risen as fast as house prices, potentially putting a strain on investors.