Editorial: Go lighter on those credit cards

It is becoming a long while since we suffered anything resembling a recession. For the past six years or so the economy has been growing strongly and defying regular predictions that the end is nigh. Can it defy the latest?

Unlikely, for the latest prognosis is not a prediction, it is a command by the Reserve Bank. When it raised the base interest rate by 25 points last week, the bank Governor, Alan Bollard, warned that he will raise the rate again in December unless he sees a reduction in household borrowing and domestic spending. These are the things that have sustained economic activity since previous interest rate rises hurt exports and industry generally.

The latest rise is bound to cause further damage to the productive sectors but it is less certain to have much effect on the activities it is intended to hit. That is because household borrowing and spending is supported by mortgages that are mostly on fixed-term interest rates these days. Only 20 per cent of mortgage debt is on the floating rates that can rise as soon as the Reserve Bank wants them to and those loans average $53,000, half the average of fixed-rate loans. If trading banks pass on the latest increase in the official cash rate - and they seem in no hurry to do so - the average floating-rate mortgage will cost an extra $2.55 a week, hardly a fearful prospect for the housing market.

Of course, fixed-term mortgages have to be renewed and it is then they will feel the weight of the Reserve Bank's monetary tightening. But fixed terms are commonly for two or three years. The bank cannot wait even one year for the housing boom to subside. It needs that to happen now. Inflation, fuelled not entirely by oil prices, is already running above the bank's target zone of 0-3 per cent and the bank's statutory task is to ensure that does not continue for too long. The lag between monetary policy and effect is at least a year so last Thursday's increase was based on the bank's predictions for the state of the economy a year or more hence.

The lags mean it is also possible that previous interest rate rises have yet to take effect on our house buying, credit card spending and excessive consumption. If previous dampeners are still coming down the pipeline the latest tightening could pitch a slowing economy into recession. That is the concern of several economists watching the bank tempt the Fates. But they also criticise the bank for being too lax through 2003, contributing to the inflationary surge that worries the bank now. The critics cannot have it both ways. If the economy is still running too hot the latest measure, and even another in December, should not cause the economy to slip into recession next year.

Business confidence has sunk badly over the past month or so, as the Reserve Bank's concerns about excessive household borrowing have intensified. The divergence is dangerous if the bank continues to work at cross-purposes with the productive sectors. The bank is also at cross-purposes with Government spending plans now. After an election that became an auction of easy promises, Labour has managed to pare back the programmes of its partners but its own promises, particularly on tertiary loans and family assistance, could put much more money into the economy next year.

That could be a blessing if the business outlook is correct, but it is a curse to the bank's monetary management. Those who must pay a little more for their mortgages soon might note that they are paying indirectly for the election-winning bribes. Right or wrong, the bank's is the view that counts. The sooner we all go lighter on the credit cards and lower our house-buying sights, the sooner the bank will relax and the economy can continue to hum.