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Interest rate rise

NEW ZEALAND is deep in the red, spending a record $12 billion more than it earned overseas in the past year, with a King Kong-sized shopping spree partly to blame.

The $11.89 billion current ac-count deficit, announced by Statistics New Zealand, is the worst since the balance of payments crisis in the mid-1980s.

The sea of red ink will get even deeper in coming months, especially because of higher imported oil prices, economists say.

A continued blow-out in the deficit could eventually tip the Kiwi dollar lower and cause interest rates to rise, some economists said.

The June quarter deficit swelled to $2.85 billion, $1 billion higher than the March and June 2004 quarters.

The current account measures all New Zealand's transactions with the rest of the world, including traded goods and services, and investment income.

A weaker New Zealand dollar increased the risks of the Reserve Bank raising official interest rates before the end of the year from 6.75 per cent to 7 per cent.

The annual deficit is now equal to 8 per cent of gross domestic product, compared with 8.9 per cent of GDP during the 1984 balance of payment crisis.

Some economists now predict the deficit will go to 8.5 percent of GDP by the end of the year and as much as 10 per cent of gap next year, partly because of strong consumer spending.

New Zealanders are also paying more in interest on a rising level of overseas debt and that trend was expected to continue, an ASB Bank economist said.

"It is unlikely we have seen the bottom of the current account deficit yet," the economist said. "It is very likely that at some point in 2006, the current ac-count will begin to weigh heavily on the New Zealand dollar."

UBS New Zealand economist Robin Clements said there was little doubt that the Kiwi dollar was over-valued and a fall was inevitable, but with the Reserve Bank still threatening to lift rates, the latest current account was not likely to trigger a fall.