Householders being told to pull their head in

Jenny Ruth

Thursday 27th October 2005

As expected, Reserve Bank governor Alan Bollard raised interest rates and waved a big stick at "the relentless housing market" and household spending, threatening further rate hikes if they don't calm down.

Bollard raised his official cash rate (OCR) from 6.75% to 7%, the first move since March. The major banks have already raised their floating mortgage rates in anticipation of today's move.

"Borrowers and lenders alike need to recognise that the current rate of debt accumulation is unsustainable," Bollard said in announcing the move.

As well as household spending, which he partly blames for the current account deficit blowing out to 8% of GDP, he is also fretting about higher oil prices flowing through into inflation expectations and increasing government spending.

The wording of the statement was sufficient for Bank of New Zealand economist Stephen Toplis to change his view of a likely further rate hike in December from a 50/50 chance to highly probable.

"We've been looking for an excuse and this is enough to give us the green light," Toplis says.

The key words in the statement from his perspective were: "The prospect of further tightening may only be ruled out once a noticeable moderation in housing and consumer spending is observed."

Robin Clements at USB Warburg says the target audience of today's statement probably isn't the wholesale interest rate market but householders. Bollard is probably hoping for headlines in tomorrow's newspapers threatening further rate rises and telling consumers to "pull your head in."

Brendan O'Donovan, chief economist at Westpac, says although housing demand is currently driving monetary policy, Bollard probably doesn't want to have to raise rates again.

"They will be worried that they're going to squash the economy but feel that they've got little choice," he says.

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