KEY POINTS:
New Zealanders' eagerness to borrow and unwillingness to save - not the Reserve Bank - has driven up the exchange rate, the bank's Governor, Alan Bollard, said yesterday.
He raised the official cash rate to 8 per cent, even with the kiwi dollar at post-float highs against the United States currency.
The NZ dollar rocketed to a fresh high of US75.66c after the announcement before drifting back to close at US75.61c, up 0.16c.
Appearing later before Parliament's finance and expenditure committee, Bollard was asked by NZ First MP Doug Woolerton if that would not hurt exporters.
A high exchange rate did hurt exporters, Bollard said. "But it's not the Reserve Bank doing this. It's the build-up of debt by New Zealanders who overwhelmingly want mortgage finance but who are unable to finance it from other New Zealanders because the household sector [as a whole] is not saving. Therefore they get it from foreigners and that puts pressure on the exchange rate."
Despite tentative signs the economy is slowing and the expectation that past rises in the OCR will bite harder as fixed-rate mortgages come up for repricing, the bank has revised up its forecasts for economic growth and inflation over the next two years.
Central to that is the surge in world dairy prices to record levels and the boost to farm incomes next season.
But the bank can only guess at this stage how much dairy farmers will use the payout to reduce debt and how big a spending spree they will go on.
Bollard said that on average the dairy boom was good for the economy. "But it means tight conditions for exporters who can't take advantage of good world prices."
However manufacturing had proved surprisingly resilient and innovative, he said. "There has been no wholesale hollowing out."
Westpac chief economist Brendan O'Donovan said there was a risk the dairy boom would give New Zealand a case of the "Dutch disease", when a bonanza from the discovery of natural gas in the North Sea drove the exchange rate up to levels that crippled other export sectors.
O'Donovan expects Bollard to raise the OCR again in July.
"The housing market refuses to roll over, every dairy farmer in the land has just won the equivalent of second division Lotto, the Government is spending up large and an election is looming," he said.
Bank of New Zealand head of research Stephen Toplis said it was simplistic to put the strength of the exchange rate down to any one factor.
Soaring commodity prices and the weakness of the US dollar and Japanese yen were also underpinning it. Bollard pointed to other currencies, including the Australian and Canadian dollars, which were at or near historic highs.
But Toplis said a key factor in the kiwi dollar's strength was excess domestic demand in the economy, which was partially the fault of the Reserve Bank for being too late in tightening monetary policy.
In its monetary policy statement the bank said that any sustained fall in the dollar would likely depend on the bank's ability to combat inflation.
ANZ National Bank chief economist Cameron Bagrie said a soft landing would not be enough to vent the inflation pressure the Reserve Bank was rightly concerned about.
"The bank might think the economy is turning but they can't be sure and they have absolutely no inflation headroom," he said.
"He's basically going to bash things until the labour market turns."
Against The Wall
* Alan Bollard raised the official cash rate to 8 per cent yesterday, the third increase since March and the 12th since early 2004.
* But the bank's forecasts still have inflation heading back into the top quarter of his target zone of 1 to 3 per cent.
* The forecast dairy payout is the latest factor he is up against.
* Others are a housing market that won't quit, a tight labour market, weak productivity and a more stimulatory fiscal policy.
