Bollard won’t stand in dollar’s way

Alan Bollard yesterday criticised banks that promoted housing loans to people who could not afford them. Picture / Martin Sykes

Reserve Bank Governor Alan Bollard will not stand in the way of the dollar when it falls, even though this will temporarily push up inflation.

He told the Employers and Manufacturers Association in Auckland yesterday that the high interest rates needed to encourage people to save had had a "difficult" side-effect - inducing foreigners to buy kiwi dollars to fund consumption.

"This has been one reason why the dollar has remained so high, although of course high commodity prices are another reason. This is starting to cause considerable discomfort for some exporters."

He said the Reserve Bank saw the exchange rate as exceptionally high and, in some respects, this was unjustifiable. In time it would fall, either gradually as domestic spending pressures eased or abruptly as global investors reassessed New Zealand as an investment destination.

Much of the housing boom has been financed by foreign savers and the inflow of that money has helped to keep the dollar high despite a gaping current account deficit and signs of a slowdown in the economy.

Bollard said slowing domestic demand would bring inflation back into the 1 to 3 per cent target zone by 2007. Such an adjustment was needed and the sooner it happened the less costly it would be.

He reiterated warnings that people's love affair with housing left them exposed to a property slump. And he took as swipe at the big Australian-owned banks for promoting loans to those who could not afford them. Comments from the property industry that activity could continue at present levels were self-serving, he said.

John McDermott of ANZ National Bank said it was clear that Bollard did not believe he had contained all the inflation pressure.

The money markets are now pricing in an 80 per cent chance of another rate hike on December 8.

As for Bollard's bid to get others to take some responsibility for reducing inflation, "he's the one with the mandate to keep inflation in the target band", said McDermott. "If he can persuade others to help, well and good. But if he can't, he has to do what he has to do. Unpalatable as it is, the only medicine the Reserve Bank has to offer is higher interest rates."

Bollard has raised the official cash rate eight times by a total of 2 percentage points since 2004.

But preference for fixed-rate mortgages has meant the effective or average mortgage rate people are paying has increased much more slowly, from 7 per cent last year to a projected 8 per cent next year.

Inflation in the housing market has spilled into the wider economy, in part because homeowners, seeing the value of their properties rise over the past five years, have felt richer and spent more on unrelated items like entertainment and travel.

Bollard said: "This may be part of a longer-term change in behaviour by baby boomers to consume more of their wealth during their lifetime."