Rate hike hurts homeowners: Turei

The Government's failure to ''get a grip'' on electricity prices and the property market resulted in the Reserve Bank again lifting interest rates, Green Party co-leader Metiria Turei said yesterday.

The central bank lifted its official cash rate 0.25 points to 3% and indicated another rise would be on its agenda in June.

Mrs Turei said the Greens had long suggested a more actively managed housing sector to reduce housing speculation.

Also, the unfettered electricity market, where prices were spiralling upwards, despite demand going down, was clearly not working.

''Today's lift in the OCR to 3%, the second hike in as many months, will cost homeowners an extra $25 a month on a $250,000 mortgage, on top of the $25 a month from the previous rate rise.

''National is driving us towards mortgage rates over 8% and that will really hurt already stressed homeowners and families struggling to keep their heads above water,'' she said.

Reserve Bank governor Graeme Wheeler took a wider view in his assessment of the economy, pointing to New Zealand's economic expansion having ''considerable momentum''. GDP is estimated to have grown by 3.5% in the year to March.

Growth was gradually increasing in New Zealand's trading partners, but inflation in those economies remained low. Global financial conditions continued to be accommodating.

Prices for New Zealand's export commodities remained high, although auction prices for dairy products had fallen by 20% in recent months.

Mr Wheeler acknowledged headline inflation was moderate but said inflationary pressures were increasing and were expected to continue doing so over the next two years.

''In this environment, it is important inflation expectations remain contained. To achieve this, it is necessary to raise interest rates towards a level at which they are no longer adding to demand.

"The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure.''

By increasing the OCR as needed to keep future inflation near the 2% mid-point, the bank was seeking to ensure the economic expansion could be sustained, he said.

Bank of New Zealand head of research Stephen Toplis said the strength of the New Zealand dollar had annoyed the Reserve Bank.

All and sundry expected the bank it lift its cash rate. However, the focus was on how Mr Wheeler would convey the message he was uncomfortable with the strength of the dollar while ensuring fixed interest rates did not dip.

The potential for getting that wrong was high but Mr Wheeler handled the message with aplomb, resulting in only modest financial market repricing, Mr Toplis said.

But the dilemma the Reserve Bank faced remained the same. The bank - and the country - would be better served with a lower currency and higher interest rates than at present.

''Engineering the outcome is near impossible. Instead, the bank is reliant on international markets deciding the New Zealand dollar should fall. The bank continues to do its best to highlight this should be so but has no power to do anything else but talk about it.''

The BNZ was also a strong believer the dollar should start to fall and the catalyst should be in recognising falling dairy prices would eventually feed into the terms of trade, he said.

The Reserve Bank bought itself time yesterday. It now had another seven weeks to put together a full set of forecasts and to watch the progress of the dollar and analyse its deflationary impact.

''It's really hard for the Reserve Bank to justify rate hikes if its forecast inflation falls well below the mid-point of its [1%-3%] target band.

"It is safe to say the longer the currency stays higher, the greater the chance there is a pause in the tightening process. The Reserve Bank can tell all in June,'' Mr Toplis said.

The Labour Party and the Council of Trade Unions also blamed rising house prices for the rate rise in what seems likely to become part of the Opposition's political campaign before the September 20 election.

- dene.mackenzie@odt.co.nz



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