Rate rise 'good for property market'

Today's interest rate rise will be good for the property market, according to the Real Estate Institute of New Zealand.

The Reserve Bank of New Zealand today hiked its key interest rate by 25 basis points to 2.75 percent, after holding it at a record low of 2.5 per cent for 13 months to fight the impacts of the global financial crisis.

Rather than scaring off home buyers, REINZ president Peter McDonald said the hike could actually provide more certainty for the property market.

"In fact home buyers are being promised a market environment in which they can safely plan long term as Reserve Bank Governor  Alan Bollard has indicated any further increases in the OCR will be only gradual if needed at all," Mr McDonald said, adding that interest rates were only one of many factors that impact the housing market.

Mr McDonald said that more than 30 percent of New Zealand mortgages were on floating rates rather than longer term fixed interest rates.

Check out current mortage rates.

"It must also be reassuring for home buyers and investors that the Reserve Bank has found clear signs we are well into a recovery with businesses planning increased investment and unemployment still trending downwards,” says Mr McDonald.  

"So those people who have been holding off on plans to buy a home can be confident it is a good time to go ahead."

BUSINESSES COMMUNITY WARY

The business community was less optimistic about the hike.

Michael Barnett, the chief executive of the Auckland Chamber of Commerce, said the thought of more interest rate rises to come was not a message businesses wanted to hear.

He said many businesses were still hurting from the global financial crisis, and were worried about the impact of the looming GST rise and other price rises that have been foreshadowed by the introduction of the emissions trading scheme next month.

"We are far from being out of the woods to getting back to sustainable growth," Mr Barnett said.

"Despite what the Reserve Bank and some other commentators are saying about the improving economy, many of my members are reporting that things are still pretty flat and they are yet to see confidence converted into profits and stronger balance sheets."

POSITIVE SIGN FOR INVESTORS

The Investment Savings and Insurance Association views the rate rise as "the first clear signal from the Reserve Bank that an economic recovery is underway".

ISI chief executive Vance Arkinstall said the central bank was "signalling its confidence that growth is slowly returning to the market".

Unlike previous periods of economic growth, Mr Arkinstall believes the economic recovery will be export-led rather than consumer-driven.

"This will be good for financial markets.

"While the recovery is likely to be slow and subject to volatility, it is a sign that augurs well for markets and the future of managed funds."

JUST THE BEGINNING?

ASB economists said the rate rise and the Reserve Bank's accompanying statement held few surprises, with more hikes expected in the coming months.

"With the domestic recovery on track, we expect the RBNZ will continue to hike the OCR steadily in 25 basis point moves at each meeting, barring a substantial deterioration in New Zealand funding costs as a result of the European soverign debt crisis."

ASB said it expected the RBNZ to keep raising rates until the OCR hits 5 percent.

Cameron Bagrie, chief economist at ANZ New Zealand, also expects the OCR to hit 5 percent over time.

Mr Bagrie said the Reserve Bank faces two upside risks in inflationary pressures and a return to indebted consumer spending, compared to one downside risk out of Europe, and New Zealand is on a gradual path to more normal interest rates as opposed to an aggressive one.

"Europe with its potential for the sovereign crisis to spill over into trading partners’ growth is a risk rather than a reality," Bagrie said.

"If the risk becomes a reality, Bollard will redefine and price things accordingly."

ECONOMIC RECOVERY

In the announcement accompanying the rate rise, Dr Bollard pointed to signs of a sustained recovery, in particular among New Zealand's major trading partners Australia and Asia, offsetting a sluggish European economy.

"The recovery in trading partner activity is continuing, with growth in Asia particularly strong,'' Mr Bollard said.

"Along with ongoing growth in Australia and recovery in the United States, this has so far offset weak growth in some other export markets. Against this backdrop, New Zealand's export commodity prices have increased sharply over the past few months, boosting export incomes."

The move, which lifts the rate from a record low which had been in place since last April, was widely expected by economists, although some lobby groups had called for rates to be held in recent days, warning that the economic recovery remained uncertain.

The Reserve Bank trimmed its economic growth forecast slightly this morning, predicting growth of 3.5 per cent in 2011, down from the 4 per cent it forecast in March.

Mr Bollard also warned that renewed signs of turmoil in the financial markets, could influence interest rates here.

''We expect the main impact on New Zealand to come through continuing upward pressure on the cost of funds to the banking system.''

Mr Bollard said further interest rate rises would ''be reviewed in light of economic and financial market developments'' however he indicated the Official Cash Rate may not be raised with the speed in which it has been in previous recoveries.

"The fact that bank funding costs are higher, long-term interest rates are higher than short-term interest rates, and a greater proportion of borrowers use floating rate mortgages should all reduce the extent to which the OCR will need to be increased relative 

 - with Businesswire

- © Fairfax NZ News