Bollard raises rates and hints at further hikes

Reserve Bank governor Alan Bollard raised interest rates, blaming strong household demand, the strong housing market and relatively robust consumer confidence.

Thursday, June 7th 2007, 9:47AM

by Jenny Ruth

Bollard raised his official cash rate (OCR) from 7.75% to 8%, his third hike this year.

While most economists had expected him to hold the OCR steady, everybody had been expecting a reasonably hawkish commentary.

Dominick Stephens, an economist at Westpac, which was one of three banks forecasting an OCR hike, says the statement was probably even more hawkish than his bank had expected.

In particular, the monetary policy statement forecasts that 90-day bank bills will remain at 8.3% right through to the first half of 2008 and will only fall to 7.5% by the end of 2009. Market average forecasts were a good percentage point below that, Stephens says.

"We can expect floating mortgage rates well above 8.5% right through to the next decade."

Wholesale interest rate markets had been increasingly pricing in a rate hike, the two-year part of the curve rising 20 basis points in the week before today's statement, and rose about another seven points after the statement was released.

The already strong New Zealand dollar surged another half cent against the US dollar to 75.60 US cents.

Robin Clements, an economist at UBS New Zealand, says that although Bollard pointed to some early indications of softening economic activity, "they seem to be downplaying the weight they put on that, saying it's not conclusive."

Craig Ebert, an economist at Bank of New Zealand, says the 90-day bank bill futures have sold off 10 to 15 points as the market starts building in yet another OCR hike, perhaps as early as the next OCR review in late July.

"We're very close to calling another rate hike for next month," and the only reason why BNZ wouldn't is if the next raft of data is particularly weak, Ebert says.

"The fact is that the (Reserve) bank demands a slowdown. It will do as much as it has to to get that."

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