Bollard likely to raise rates despite political pressure

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The odds are that Reserve Bank governor Alan Bollard will raise interest rates this week, despite the highly politicised debate over the relentless rise of the New Zealand dollar.

Sunday, July 22nd 2007, 2:49PM

by Jenny Ruth

Of 17 economists surveyed by Reuters, 11 are expecting him to raise his official cash rate (OCR) and even those who expect Bollard to hold his fire still give 40% odds of a rise.

Robin Clements, an economist at UBS New Zealand, is one of the latter. "There's a pretty tangible risk that they do hike again," he says.

Nevertheless, "overall monetary conditions, if you include the exchange rate as well (as interest rates), are exceptionally tight already," Clements says. He would prefer Bollard to wait and see whether the three OCR hikes he has made since March are starting to bite.

Darren Gibbs at Deutsche Bank agrees that "policy's very tight right now and, given enough time, it would probably do the trick."

But he thinks it will be precisely the central banker's concern about the soaring currency that will cause him to lift the OCR.

"The only way the currency's going to come down is if the housing market gets squished," Gibbs says.

The latest figures from the Real Estate Institute show the national median house price rose 12.1% in June from a year earlier.

"The currency is where it is because people think this economy is bullet-proof. Why would the currency fall when the economy's going so strong and we've got bumper commodity prices? Until that perception changes, the currency's going to be high."

Stephen Toplis at Bank of New Zealand says that Bollard is in a no-win situation but that he should raise rates anyway. While non-dairy exporters are hurting, "heightened inflationary pressure in input costs is hurting most, not just some, New Zealand businesses. Rising labour costs, rates, rents and energy prices are clobbering all and sundry."

Toplis also points out that although the New Zealand dollar is strong against the US dollar and the yen - for reasons relevant to Japan and the US that have nothing to do with the New Zealand economy - it is little changed against the Australian dollar, the Euro and the British pound from where it was 19 months ago.

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