Interest rate up again, but tightening phase nears end

9.15am

Reserve Bank governor Alan Bollard today hiked interest rates for the sixth time this year, but surprised markets by saying the tightening phase was over.

The cash rate was raised to 6.50 per cent from 6.25 per cent, which is likely to flow through to floating mortgage interest rates.

On the other hand, the New Zealand dollar, which neared a historic high of US70.51c this week, is likely to subside, providing relief to exporters.

Dr Bollard said the economy was still performing strongly and had continued to provide positive surprises.

Resources would remain stretched for some time yet and inflation pressures remained.

"However, the recent monetary policy tightenings still have to work their way through the economy, and the high exchange rate will also have its effect," Dr Bollard said.

"Given this, we believe that the current settings of monetary policy are now doing enough to ensure price stability as defined in the Reserve Bank's Policy Targets Agreement," he said in a short statement.

He refused requests to answer questions.

The end of the tightening phase comes despite Reserve Bank forecasts that inflation will rise above the 1 per cent to 3 per cent range in which the bank is mandated to hold it.

However, the Policy Targets Agreement gives the bank flexibility to allow a breach of the target range for limited periods so that the bank does not cause undue volatility in economic growth.

In its September quarter bank for forecasts, Dr Bollard signalled he would almost certainly hike rates at this cash rate review and would probably do so again at the next Monetary Policy Statement (MPS) on December 9.

Since the September MPS, economic data, particularly in the labour market and for retail sales, have been generally much stronger than economists' forecasts.

As well, world oil prices have shot up to over US$54 ($78.44) a barrel, which means local petrol prices and the flow on effects will feed into inflation.

Even the buoyant housing market has shown resilience, with median house prices going up last month despite a slowdown in the number of house sales.

Against that, a high dollar helps to quell inflation with import prices down and domestic producers under pressure form cheaper imports.

Exporters are normally screaming when the currency gets so high. But they have been insulated by the fact that export prices have been up at 30-year highs, fuelled by an economic boom in China.

A survey out today showed their mood was buoyant despite the kiwi being near historic highs, not just against the US dollar, but against all the currencies of New Zealand's main trading partners.

Economists had feared that Dr Bollard would hike rates again in December at a time when the economy was finally starting to turn down.

The effects of the previous interest rate hikes, higher petrol prices, anticipated lower house prices and immigration would finally be starting to take their toll.

However, a number of banks have been cutting their two-year fixed interest rates, undermining Dr Bollard's previous rate hikes.

Banks have able to do that because these rates have been funded from the bond market and two-year bond yields have been falling in anticipation of an economic slowdown.

Forex markets reacted swiftly to Dr Bollard's comments.

The New Zealand dollar sank to US68.94c at 9.10am, from 69.30c 10 minutes earlier.

Against the Australian dollar, the kiwi was at A92.56c at 9.10am, from A93.07c at 9am.

- NZPA