Rates up, but mortgage OK

By BRIAN FALLOW

Homeowners can feel some relief despite yesterday's rise in interest rates from the Reserve Bank.

After four rate rises in four months, Acting Reserve Bank Governor Rod Carr has now indicated that interest rates will not need to go as high as he thought in May.

As expected, Dr Carr yesterday raised the bank's official cash rate from 5.5 to 5.75 per cent, completing the process of taking back the "insurance" interest rate cuts the bank made after September 11.

But he back-pedalled from the May monetary policy statement, in which he said the cash rate might have to go as high as 7 per cent, implying floating mortgage rates of 9 per cent.

Economists still expect Dr Carr to push rates up a further 50 points, to a cash rate of 6.25 per cent, before he is done.

The main change since May has been a rapid rise in the exchange rate. The dollar has veered from being a tailwind behind the economy to a headwind, which means interest rates have less work to do to slow it down.

Export commodity prices fell 6.3 per cent last month, mainly because of the stronger dollar. They are now 24 per cent lower than at this time last year.

But Dr Carr said export incomes, though declining, were still at very healthy levels.

The economy is also benefiting from strong flows of tourists and long-term migrants.