Business is fearing big, public service-led pay increases later this year may drive up inflation and interest rates.

The Employers & Manufacturers Association (Northern) is warning that pay settlements in the order of seven per cent will be taken back by banks recovering higher mortgage costs, and kill off the investor confidence struggling to emerge.

"The Governor of the Reserve Bank is right to point out last week that overseas price hits cannot be allowed to flow into wages and salaries," said Alasdair Thompson, EMA's chief executive.

"On this occasion we agree with him.

"Unfortunately our economic growth in recent times has been based on consumer spending on imports, not on boosting the value of our production. This is not a good basis for giving ourselves a pay rise.

"We would be derelict in our duty if we did not point out that the health and education sector expectations for salary increases hovering around seven per cent are a major cause of concern.

"The two groups are probably worth more than that but their representatives have their heads buried if they think their claims can be contained solely within the groups they represent.

"With the Employment Relations Act in place, other unions will be keen to prove their mettle.

"The last thing we need is an old fashioned wage/ prices blow out.

"If they succeed, the resulting hike in interest rates will exceed the take home pay increases of those on lower incomes.

"The NZ dollar will end up buying less from overseas too.

"The downstream impact of higher interest rates is that further investment in our structurally unbalanced economy will be deterred. New jobs, and investment in new equipment and skills will be affected. New housing starts will become more expensive, and the Government's social programme will be placed at risk.

"Our transition to an export-led economy has a long way still to go to reduce our huge trade deficit, which is continuing to increase our levels of national debt.

"Until we reverse this, everyone has to practice wage and salary restraint, business owners and managers the same as for wage workers. "

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