Reserve Bank hikes interest rate

02:35, Jun 12 2014
graeme wheeler
Reserve Bank Governor Graeme Wheeler.

Prime Minister John Key says the Reserve bank rate increase was predictable.

"In a way it reflects the fact that we've got a very strong economy," he said.

"It's growing at around 4 per cent, it's creating a lot of jobs - 84,000-odd jobs were created in the last 12 months."

The Reserve Bank this morning raised the official cash rate by 25 basis points to 3 per cent, the third rise this year, and said more rises were to come.

Key agreed migration had played a part in the bank's decision, albeit a minor one.

"Migration has some impact on the housing market, there's no question about that, but on the other side of the coin it's very difficult to control those flows of migration given the number of people coming in isn't actually changing," he said.

"What has been changing, and it's reflected in the strength of the economy, is that New Zealanders aren't actually leaving in droves for Australia."

He disagreed however, that lower-than-expected wage increases had contributed.

"Overall, wages are rising and they're rising faster than inflation, so that's really the big issue," he said.

"You are starting to see somewhat of a move up in wages, and actually the [Reserve Bank] governor himself has pointed to that, and the expectation of wage rises is one of the reasons he's raising interest rates.

"So, you can't be right on both counts."


Homeowners can expect another hit after the Reserve Bank signalled higher interest rates.

A further rise in July is now seen as increasingly likely, with a clear signal this morning from the Reserve Bank that rates would rise twice more by the end of the year, economists said. That is likely to be followed by three more increases next year.

The rate was lifted 25 basis points today, and Westpac Bank chief economist Dominick Stephens expected increases in September and December by the same amount.

ASB Bank chief economist Nick Tuffley said there was a 60 per cent chance of a rate rise in July, but predicted there would then be a pause before another move in December.


There was little sign the Reserve Bank would deviate from the course it set in March, which showed rises totalling 125 basis points this year, he said.

The Reserve Bank also said New Zealand's high exchange rate was "not sustainable" and was expected to fall.

The Reserve Bank has already raised rates twice this year, pushing short-term mortgage rates up about 50 basis points to about 6.25 per cent. Today's official rise will nudge them up again.

The central bank is also warning that if the migration boom is bigger than expected, interest rates would need to rise faster and further than expected.

Reserve Bank Governor Graeme Wheeler said the official interest rate would need to move up to a "more neutral level" because inflation pressures were expected to rise, with the economy showing "considerable momentum".

A neutral rate, neither pushing the economy ahead nor holding it back, is about 4.5 per cent to 5 per cent.

The bank's latest Monetary Policy Statement, released this morning, shows short-term interest rates are expected to rise about 200 basis points to more than 5 per cent by early 2017.

Wheeler said in today's statement that by lifting rates "as needed" to keep future average inflation near the 2 per cent target, the bank was aiming to ensure the present economic expansion could be maintained.

However, despite a projection showing interest rates would keep rising, inflation was expected to remain at just 1.5 per cent until the end of this year and only hit 2 per cent in the middle of next year.

The Reserve Bank said the economy was estimated to have grown about 4 per cent in the June year, and economic growth among New Zealand's trading partners was gradually improving.

While prices for New Zealand export commodities remained "historically high" their recent falls would cut farm incomes in the coming year. Dairy prices have plunged about 26 per cent since the start of the year.

"The exchange rate has not yet adjusted to weakening commodity prices, but is expected to do so," Wheeler said.

House-price inflation remains high, but the market had "moderated" since late last year after the Reserve Bank imposed limits on low-deposit home loans, and interest rates started to rise this year.

National annual house-price inflation fell to 9 per cent in the December quarter and by April it was down to 8.6 per cent.

House-price rises should ease further as interest rates continue to rise.

As more new homes are built, interest rates continue to rise and if net migration slows as expected, the Reserve Bank projects house-price inflation to drop to zero in 2017.