11 Jun 2010

Bollard downplays fears of rising kiwi after OCR hike

6:09 am on 11 June 2010

The Governor of the Reserve Bank has downplayed fears he's pushing up the New Zealand dollar by raising the Official Cash Rate for the first time in almost three years.

That is despite the kiwi gaining a cent after the bank raised the cash rate by a quarter of a percentage point on Thursday morning, to 2.75%.

Unions, employers groups and Federated Farmers had urged the Reserve Bank not to lift the cash rate.

The Exporters and Manufacturers Association labelled the decision reckless given the patchy nature of the global recovery.

However, Governor Alan Bollard does not expect the rise in the dollar, which jumped 1 cent in the afternoon against the greenback to 67.8 cents, to be long-lasting.

He says heavy borrowing by New Zealand banks overseas to fund home loans has put upward pressure on the exchange rate in the past.

But Dr Bollard says the weak housing market means that is not the case now.

Interbank base borrowing rates rose after the announcement.

ANZ National says it would not lift its floating rates on Thursday but won't rule out moving at a later date.

ASB Bank, the Bank of New Zealand and Kiwibank are reviewing their rates, while Westpac says it won't make a decision until early next week.

Farmer, union reactions

The Council of Trade Unions says raising the cash rate will significantly affect home mortgage repayments.

CTU economist Bill Rosenburg says the rise will lift the cost of servicing a $200,000 floating mortgage by about $10 a week.

He says it could also discourage business investment, particularly if interest rates continue to rise which will affect economic recovery.

Mr Rosenburg says 90-day interest rates are predicted to increase from the current 2.9% to 4.2% in March next year.

Federated Farmers says it's disappointed with the rise because it believes the export economy is still fragile.

The organisation's economics and commerce spokesperson, Philip York, says while agricultural commodities are fetching record prices overseas, that is not filtering back to farmers in New Zealand.

Full OCR story, statement in Business News