Bollard lifts interest rates to 6.75 per cent

Reserve Bank Governor Alan Bollard

In a move likely to push the New Zealand dollar higher and cause more pain to exporters and borrowers, the Reserve Bank today lifted interest rates again.

Governor Alan Bollard, in his quarter review of Monetary Policy, lifted the Official Cash Rate from 6.5 per cent to 6.75 per cent, citing a stronger than expected economy and "stronger underlying inflation pressure than we expected".

Dr Bollard said there was little scope for an easing in policy in the foreseeable future and it would be "imprudent" to rule out a further rate hikes.

"Whether there is any further tightening ahead will depend on how the risks play out over the coming period."

The New Zealand dollar this week touched a post float higher of US74.07c and shortly before Dr Bollard made his announcement was at US73.56c.

The kiwi spiked to US73.82c immediately after the OCR was lifted by 25 basis points.

Yesterday, Finance Minister Michael Cullen said the level of the currency was of "real concern" and it was affecting the current account account deficit that was "uncomfortably high".

Dr Bollard acknowledged the decision to lift rates was difficult as the economy appeared to be at a turning point.

"We have to confront the possibility that a further tightening in policy at this stage of the cycle might exacerbate an eventual slowing in activity.

"However, not responding to the prospect of stronger inflation pressures now would create a risk that inflation expectations and wage and price setting behaviour could change in a way that would make the task of containing inflation more difficult in the future, even if growth slows."

Dr Bollard's comments appear to be a shot across the bows of the union movement's campaign for a 5 per cent wage hike.

The RB is now forecasting inflation will be at the very top of the bank's 1-3 per cent target through all of this year and next.

Even in 2007 it is forecast only to slow to 2.5 per cent in the second half of that year.

- NZPA