Bollard warns consumers and politicians

Reserve Bank Governor Alan Bollard has warned consumers and the incoming Government that a spend-up could lead to higher interest rates.

The alert came as Labour rounds off negotiations with other parties in an attempt to remain in government.

Dr Bollard's strongly worded speech in Rotorua yesterday left no doubt that interest rates would rise after the next official cash rate announcement in 12 days.

He warned householders against a spending binge, financed largely by borrowing against their houses, saying rising prices would not last.

He also said New Zealand households had the worst savings record in the OECD and, collectively, spent 12 per cent more than they earned.

Consumers' Institute chief executive David Russell said New Zealanders should heed what was a serious warning.

"If you're up to your neck [in mortgage debt] now, start sweating. If you still have a little leeway, don't be seduced by the finance companies trying to lend you more money."

Dr Bollard told home-owners that gains from the bubble of rising prices could not be relied on to back up borrowing for items such as new cars. His words were also bad news for businesses, threatened with higher interest rates, and for retailers, trying to sell to consumers with less in their pockets.

Dr Bollard also warned foreign investors to expect the New Zealand dollar to fall in value, saying the exchange rate "appeared to have reached an unsustainable level".

Data on Monday is expected to show inflation in the September year has climbed well above 3 per cent.

The prospect of a new Government embarking on increased spending adds to the existing headaches of household spending and oil price rises.

"A growing fiscal surplus has clearly made higher levels of government expenditure affordable in the longer term," Dr Bollard said.

"A more expansionary fiscal stance has the potential to aggravate the current account deficit as well as increasing the work monetary policy has to do in order to contain inflation" - Dr Bollard's way of saying he might have to lift interest rates.

"These pressures will need to be borne in mind as the incoming Government considers its fiscal options."

Dr Bollard has issued such warnings in the past, as recently as two days before the election.

But his warnings yesterday, in a speech to the Credit and Finance Institute, were sharper and, unusually, directed at the Government hopefuls.

The current account deficit is the difference between what the country earns overseas in exports and investments and what it pays for imports and to foreign investors and is also known as the balance of payments.

The deficit at the end of the June quarter was $11.9 billion or 8 per cent of GDP.

Finance Minister Michael Cullen welcomed the speech yesterday as a "powerful reinforcement" to his own message about the seriousness of the current account deficit.

Labour has been involved in negotiations with four parties since final votes from the election were known two weeks ago. But the most expensive policies - besides its own big-ticket items - are New Zealand First's, totalling an estimated $4 billion including substantial increases in superannuation payments over time.

Dr Cullen said it was his job to make sure that new spending did not rise above the $1.9 billion the previous Labour-led Government had budgeted for in each of the next three years.

"Fundamentally my job is going to be to get very close to that stepped allowance encompassing whatever combination of policies emerges out of the discussions [with other parties]," said Dr Cullen.

"We do have to be very careful and be very conscious of the fact that any agreement is one that's got to be implemented without any significant fiscal loosening."

- additional reporting Mathew Dearnaley