Bollard's inflation pill will hit exporters

Reserve Bank Governor Alan Bollard will raise interest rates today to try to slow the economy, even as a hard landing next year looks increasingly likely.

Dr Bollard needs to lift rates to clamp down on inflation caused by rampant consumer spending and the booming housing market, but there are concerns that the likely rise could further damage the export sector.

The rate rise will probably take the official cash rate to 7.25 per cent and add over $40 a month to the repayments on a 25-year $250,000 home loan.

But about 80 per cent of homeowners have fixed-rate mortgages and so will not feel the brunt of the increase until later next year.

First to feel the impact of the rise will be already struggling exporters if the dollar climbs.

Westpac chief economist Brendan O'Donovan said Bollard had to balance his job of fighting inflation - currently running at 3.4 per cent a year - with the risk that the wider economy could suffer from another rate rise.

The increase comes as international ratings agency Standard & Poor's warned that if New Zealand's current account deficit increased much further, the country's international credit rating was at risk.

But S&P said it expected the current account would eventually fall, and reaffirmed New Zealand's foreign currency rating at AA+ , just short of the highest possible grade.

The current account deficit - New Zealand's debt with the rest of the world - has blown out to around 8 per cent of gross domestic product, in part because of New Zealanders' seemingly insatiable appetite for imported goods.