Why our interest rates are the highest in the world

Reserve Bank governor Alan Bollard is almost certain to lift interest rates on Thursday, and again in October, taking the official cash rate up to 6.5 per cent.

At 6 per cent, New Zealand's rate already easily tops Australia's 5.25 per cent and is far higher than the United States on 1.5 per cent and Japan on just 0.1 per cent.

Why? The main reason is that New Zealand's economy is running brilliantly. In contrast, the US is trying to recover from a big downturn and Japan is just emerging from a 10-year stagnation.

They need much lower rates to boost their economies and face little prospect of inflation getting away.

There is a view that if the New Zealand economy grows faster than 3 per cent a year, interest rates have to rise to prevent inflation, and some economists expect inflation to hit 3.5 per cent next year.

Read More - Opens in a new window