19 Aug 2010

Bollard warns of interest rate rise to combat inflation

6:44 pm on 19 August 2010

The Reserve Bank has warned firms and people against using the forthcoming rise in GST as an excuse to lift prices and wages, saying it will be forced to ramp up interest rates in response.

The central bank's governor, Alan Bollard, told a business audience in Taranaki on Thursday that higher inflation expectations will damage the patchy economic recovery.

GST is set to rise from 12.5% to 15% on 1 October.

The Reserve Bank is forecasting inflation to peak at about 5%, driven by the GST rise and other charges such as ACC levies and emissions charges.

The bank believes the spike in inflation will be short-lived and the effects will have largely disappeared by later next year.

However, Dr Bollard is taking no chances, saying companies, unions and households should not use the rise in GST as a veil to increase margins and wages.

He says if they did, prices would rise significantly, forcing the bank to boost the cost of borrowing and that would hurt the economic recovery.

In July, the Reserve Bank raised the benchmark interest rate to 3%, but signalled further rises would be more gradual because of the muted recovery.