'Real chance' of interest rates rising

Reserve Bank Governor Alan Bollard was talking tough yesterday, warning he was less confident than three months ago that he would not have to raise interest rates again.

The economy is cooling but more slowly than the bank expected. The jobs and housing markets are proving particularly resilient.

Inflation has already been above 3 per cent - the top of Dr Bollard's target band - for a year and the bank does not expect it fall back below it for another year. So there was little leeway to withstand any surprises that added to inflation pressures, he said.

If the economy panned out as the bank expected, the country would get through without another interest rate increase; if not, there was a real chance of one.

The kiwi dollar jumped nearly 1c against the US dollar on the news.

Dr Bollard is counting on consumer spending flatlining over the next couple of years.

Sales of big-ticket items, cars especially, have already fallen and retail sales figures recently have been pointing to a broader slowdown.

Crucial to the bank's forecast that consumer spending will weaken further is the belief the housing market will continue to lose momentum. As long as house prices keep climbing, homeowners are willing to borrow and spend on the strength of that increase.

The bank also expects the average mortgage rate to keep rising. A lot of fixed-rate mortgages are due to mature soon, especially loans taken out during the "mortgage wars" in late 2004.

Offsetting that has been the stimulus of more jobs, higher wages and a boost for working families.

Some private sector forecasters see weaker growth and less inflation ahead than the Reserve Bank does.

They query why it is keeping interest rates high and talking about the possibility of another rate hike when the economy has already slowed and the bank itself forecasts three more years of below-par growth.

But Dr Bollard's job is to keep inflation in check and he has to guard against the risk the longer it stays high the more danger there is it becomes self-perpetuating as people seek to recoup the higher costs they face from their employers or their customers.