Mortgage rate climb likely

As expected, Dr Bollard raised the official cash rate from 5.5 to 5.75 per cent but in a stern accompanying statement he has pencilled in another half a percentage point beyond that, which would push floating mortgage rates to around 8.5 per cent.

Many economists think that warning shot goes too far.

"The housing market has plateaued," said Westpac chief economist Brendan O'Donovan. "Sentiment has changed and the market will adjust of its own accord. It didn't need this additional kick in the guts."

Westpac is raising its floating mortgage rate from 7.75 to 8.1 per cent.

Dr Bollard is tightening the screws even though he expects economic growth to slow, from 3.5 per cent now to a low of 1.75 per cent by early 2006. His problem is that the pent-up inflation pressures after three years of strong growth are no longer being offset by a high dollar.

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