Oct. 28 (Bloomberg) -- New Zealand central bank Governor Alan Bollard raised the benchmark interest rate by a quarter point to 6.5 percent and said the sixth increase this year may be the last as economic growth slows.

The currency and bank bill yields fell after Bollard, 53, said higher borrowing costs and the New Zealand dollar's 13 percent gain the past year should be enough to combat inflation. He raised the official cash rate, the overnight lending target rate for banks, to a four-year high.

``The current settings of monetary policy are now doing enough to ensure price stability,'' Bollard said in a statement released in Wellington.

New Zealand's benchmark rate is the highest among countries rated AAA by Standard & Poor's, and Bollard's six increases this year outpace the five by the Bank of England and three by the Federal Reserve. The New Zealand dollar's gain has crimped overseas sales of companies including Carter Holt Harvey Ltd., the biggest lumber maker in Australia and New Zealand.

The currency has ``strengthened to such a degree it makes us completely uncompetitive,'' Wayne Chung, managing director of Cavalier Corp., an Auckland-based carpet maker said in an interview. ``The strong dollar does affect us and we're not lonely there of course.''

The New Zealand dollar's advance, to an eight-month high 70.54 U.S. cents this week crimps exports, which make up 30 percent of the economy. That will slow spending and curb inflation, reducing the need for Bollard to raise rates, analysts said.

Dollar Declines

The local dollar fell as much as 2.1 percent after Bollard's statement and is heading for its biggest one-day decline in two months. It bought 68.76 U.S. cents at 12:55 p.m. from 69.3 cents before the announcement. The yield on a three-month bank-bill futures contract maturing in December fell to 6.74 percent from 6.81 percent.

``We would expect that this is going to be the start of the New Zealand dollar losing its gloss,'' said Nick Tuffley, senior economist at Westpac Banking Corp. in Wellington.

``It looks like the chances of a December rate increase are pretty modest,'' he said. ``That looks like it unless we see a stunning run of economic data.''

All 14 economists surveyed by Bloomberg News expected the increase. Ten of 14 expected Bollard would keep rates unchanged at his next review Dec. 9.

Last month Bollard, who is required by the government to keep annual inflation on average in a range from 1 percent to 3 percent, forecast inflation would accelerate to 3.25 percent in the second half of next year. Consumer prices rose 2.4 percent in the year ended Sept. 30.

Strong Economy

Bollard is raising rates to slow an economy that expanded 5.7 percent in the second quarter from a year earlier, the fastest pace in four years. Growth, buoyed by house construction and consumer spending, is fueling inflation, he said.

``New Zealand's economy is still performing strongly and recent domestic economic data has delivered positive surprises,'' he said. ``Resources will remain stretched for some time yet and there are still inflation pressures.''

Bollard last month forecast the economy will expand 2.5 percent in the first quarter of 2005 from a year earlier. The central bank publishes forecasts every three months.

A housing boom and low unemployment continue to buoy consumer spending and the economy. Retail sales rose 7.6 percent in August from a year earlier. Third-quarter consumer confidence rose to its highest this year, according to an index compiled by Westpac Banking Corp. and McDermott Miller Ltd.

House prices in September rose 16 percent from a year earlier, according to a report from the Real Estate Institute. New Zealand's jobless rate was a 17-year low 4 percent in the second quarter.

Housing May Slow

Still, economists said declining home-building approvals and monthly house sales are a sign the housing market is slowing as lending costs rise and the nation attracts fewer migrants.

``We expect a considerable pullback next year on the combination of higher cash rates and absent migration flow,'' said Annette Beacher, senior economist at Citigroup Global Markets in Sydney.

Building approvals fell to an 18-month low in August. House sales fell for the fifth month in six in September. The nation welcomed 56 percent fewer migrants in the year ended Sept. 30 from the year earlier.

The New Zealand housing market has been targeted by the Reserve Bank, said Cavalier's Chung.

``We've seen a bit of softening I suppose in the residential carpet area,'' he said.

Bollard last week said his attempts to slow the housing market and curb spending by raising interest rates have been undermined by an increase in fixed-rate lending. Bank of New Zealand Ltd. last week set a two-year fixed home loan at 7.15 percent. Its variable rate is 8.5 percent.

``The effective mortgage rate has gone up a little more slowly than the actual official cash rate,'' Bollard said at a news conference last week.

To contact the reporter on this story: Tracy Withers in Wellington, New Zealand at twithers@bloomberg.net.

Last Updated: October 27, 2004 20:32 EDT