Bollard raises rates but suggests he may be done

-Jenny Ruth

Thursday 26th July 2007

Warning of sustained inflationary pressures, Reserve Bank governor Alan Bollard has raised interest rates, in line with most economists' expectations but in defiance of political pressure amid concerns about the impact of the soaring New Zealand dollar on exporters.

Bollard raised his official cash rate (OCR) from 8% to 8.25%. It is the fourth time since March that Bollard has hiked the OCR. He singled out the tight labour market, high capacity use and rising oil and food prices as evidence of inflationary pressures.

Bollard has been particularly concerned about the rampant housing market and noted early signs of New Zealanders moderating their borrowing.

"Provided they keep this up, and the pressure on resources continues to ease, we think the four successive OCR increases we have delivered will be sufficient to contain inflation," Bollard said.

Brendan O'Donovan, chief economist at Westpac, says that Bollard is hoping he doesn't need to raise rates again.

"It's quite a cleverly crafted statement to try to maintain pressure on the domestic economy and borrowing and to take some of the upwards pressure off the currency," O'Donovan says.

The early indications were that had worked - while the currency spiked up immediately after the hike was announced, once the commentary was published, the New Zealand dollar eased somewhat. From about 80.25 US cents before the announcement, the currency had fallen to 80.07 cents 15 minutes later. The New Zealand dollar has climbed from about 60 US cents a year ago.

"Doing more rather than less is ultimately better for getting the currency down," says Darren Gibbs at Deutsche Bank. If the market believes that Bollard is serious about slowing the economy, there is less justification for such a high currency, he says.

"The banks has said it's done enough," Gibbs says. "Some would suggest that may be aimed at the politicians. Bollard will be aware that they're (the central bank) going to take some flack today."

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