Interest rates held steady

BY JAMES WEIR

The Reserve Bank is holding the official cash rate rate steady at 2.5 per cent but has indicated that rates will start rising around the middle of the year.

At its Monetary Policy Statement this morning, the central bank held the rate steady for the seventh time in a row.

The last change was a 50 basis point drop in April last year, marking the end of the huge cuts during the global financial crisis.

Bank economists lean towards rates rising as soon as June, or as late as September, with the official cash rate slowly rising from 2.5 per cent to around 5 per cent, which will push up floating mortgage interest rates.

The central bank had been expected to be cautious about lifting interest rates because the recently weak housing market, subdued household spending and a higher than expected unemployment rate of 7.3 per cent announced in February.

The global economy is still recovering from the international financial crisis and is better than the Reserve Bank expected in December.

Domestic economy

Domestic financial conditions were much tighter than would normally be associated with a 2.5 percent OCR, the Monetary Policy Statement said.

Giving itself a pat on the back, the Reserve Bank said the OCR had been held at the record low 2.5 per cent for almost a year, in response to a significant global recession, tight credit conditions, wide interest rate spreads, and a contraction in the New Zealand economy.

"It appears that these attempts to keep interest rates low were appropriate, given the extent to which the New Zealand economy has contracted and inflation pressures abated," the MPS said.

Economic momentum to build

Recovery in economic activity was expected to build momentum through 2010, with the rebound forecast to be broad-based.

Gross domestic product was forecast to grow 3.2 percent in 2010 and 4.2 percent in 2011, the MPS said.

Those rates of growth were lower than historic norms following a recession, reflecting tight credit conditions and attempts by households and businesses to reduce debt.

Bank lending weak

Bank lending remained weak, with lending to households and the agricultural sector growing only modestly, while business credit continued to decline.

"It seems that this weak credit growth is a reflection of caution by both borrowers and lenders," the MPS said.

Property prices flat

House prices were expected to stagnate, with recent strength in prices appearing to have been only temporary, as activity in the housing market was abating.

House prices remained high relative to incomes, and recent rises in mortgage rates would further affect affordability. Potential tax changes may also weigh on house prices in the medium term.

Consistent with the outlook for house prices, residential investment was forecast to be historically weak.

After regaining its pre-recession level, consumer spending was projected to grow slowly, rising 2.8 percent in 2010, then slowing to just 0.9 percent in 2012.

Business demand for credit was "very low".

"Our business contacts remain focused on consolidating their balance sheets and protecting cash flows. This balance sheet consolidation has shown through in a significant reduction in aggregate investment and a decline in bank lending," the MPS said.

- with NZPA

- © Fairfax NZ News