KEY POINTS:
The Government is taking the flak after the Reserve Bank again raised interest rates today.
Bank Governor Alan Bollard hiked the Official Cash Rate (OCR) to a record 8 per cent from 7.75 per cent this morning.
The move was a surprise, with most economists expecting the rate to be held steady.
As well as pushing up general lending rates, the move is likely to put further upward pressure on the exchange rate, which this week hit US75.5C, its highest level since it was floated 22 years ago.
Following the announcement, former Labour finance minister Sir Roger Douglas and high profile economist Gareth Morgan laid into the Government over its spending record, blaming it for inflation.
Sir Roger told Newstalk ZB: "I think this is the worst government we have had for 50 years. I Know Muldoon went mad in the last couple of years of his period, but this Government is doing things which are equally as bad if not worse."
Mr Morgan said too much was being spent on health boards and building roads and said inflationary pressures meant Dr Bollard had no choice.
The Engineering, Printing and Manufacturing Union said it was disappointed by today's decision, which would adversely affect workers and exporters.
National Secretary Andrew Little said: "In the last few days we've seen Amcor and Skellerup cutting 140 jobs between them and one of the factors in both decisions was the high New Zealand dollar and the pressure it's putting on both the price of exporting and the cost of competing with imported products.
"It's about time we paid attention to the effect monetary policy is having on the Kiwi dollar and on New Zealand workers and recognised that it simply isn't working for us."
Auckland's Chamber of Commerce described the rates rise as a "kick in the guts".
However, the rate hike got support from the Canterbury Manufacturers Association, which called for decisive action to get rid of inflation rather than the "slow death" the economy had been experiencing.
A number of large Canterbury and other exporters have this year said they were quitting New Zealand, largely due to the high dollar.
Dr Bollard said in his quarterly Monetary Policy Statement (MPS) the economy was very stretched with household demand growing strongly and that was driving up inflation.
"A sustained period of slower growth in domestic activity will be required to alleviate inflation pressures," he said.
Although Dr Bollard made no mention about the prospect of further hikes, he said the risks were that domestic activity would strengthen further despite some signs of economic growth slowing.
Today's hike is the third this year and the 12th since Dr Bollard started his credit squeeze at the beginning of 2004 when the OCR was 5 per cent. New Zealand's official rates were already the highest in the developed world before today and compare with Australia's rate of 6.25 per cent.
That means borrowers with a $150,000 mortgage are paying around $50 a week more in interest payments than those across the Tasman.
Dr Bollard noted that although lending rates had risen significantly in recent months, "we have have not seen the effect of these increases on domestic demand and inflation pressures".
The bank assumes that 90-day bank bills from which banks fund much of their lending will be significantly higher than it assumed in its March forecasts.
It assumes they will be 8.3 per cent for a year against the March assumption of 7.9 per cent. Even by the first half of 2009, they assumed to be up around 7.9 per cent which translates to mortgage and business lending rates remaining close to 10 per cent for another two years.
Numerous pages of the MPS were devoted to analysing the "remarkable" and "exceptional" rise in dairy prices.
He said the rise in the dairy sector would provide a substantial boost to economic activity over the next few years but would also add to inflation pressures.
Dr Bollard acknowledged "parts" of the export sector would face challenging conditions due to the high dollar, which he reiterated was at an exceptional and unjustified level based on New Zealand's "fundamentals".
Although the bank, as it invariably does, forecast house price inflation to come back to zero in a couple of years, it noted considerable "upside risk" to that prediction.
"However, the further house prices rise, the greater the possibility that the eventual correction in house prices will be significantly sharper than assumed in our predictions."
It noted house prices fell almost 38 per cent over six years in the 1970s.
The bank projects consumer price inflation to fall from the current 2.5 per cent to 2.2 per cent in the March 2008 year, but it then climbs close to the top of the bank's target range of 1-3 per cent the following year.
The New Zealand dollar index, measuring the kiwi dollar against the currencies of New Zealand's main trading partners, is assumed to be 5.4 per cent higher in the second half of this year than it was assumed to be in March. The TWI is over 73 at present, a record level apart from one week in December 2005.
The bank projects a similar growth path to its March forecasts, with the economy growing from 1.7 per cent in the March 2007 year to 3.1 per cent in 2008 and 2.8 per cent in 2009.
- NZPA, NZHERALD STAFF, NEWSTALK ZB
