RBNZ holds official cash rate at 2.5 pc

JAMES WEIR
Last updated 12:26 12/12/2013

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Looming interest-rate rises are expected to take a bigger bite out of household budgets after the Reserve Bank said rates would rise more than previously thought in the next two years.

While the bank held the official cash rate (OCR) at 2.5 per cent, economists said it was expected to start raising rates in March, rather than in April as indicated a few months ago.

The Reserve Bank is warning official interest rates could rise to 4.75 per cent, up 2.25 percentage points, in the next two years, to keep inflation in check.

The bank also expects house-price inflation to ease partly as a result of its recent move to put the brakes on low-deposit mortgage lending.

House prices have risen more than 18 per cent in the past two years, fuelled by low interest rates, rising migration and a shortage of homes in regions such as Canterbury and Auckland.

The Reserve Bank's speed limit on low-deposit loans was expected to subtract 1 to 4 percentage points from annual house-price inflation in the first year.

"However, the impact is very uncertain," the bank said

Buyers with low deposits are now being charged about 50 basis points more on their interest rates than borrowers with a bigger deposit. The cheapest interest rates in the market for borrowers with a large deposit are as low as 4.95 per cent, fixed for six months or a year.

Almost 75 per cent of borrowers are on either floating or fixed rates of less than a year, which means rising interest rates next year will still rapidly hit interest repayments and eat into household budgets.

INCREASES AHEAD

Westpac Bank chief economist Dominick Stephens said the Reserve Bank forecast indicated that March was the target date, and rates would rise 110 basis points over 2014.

However, Westpac is still picking the first rate rise in April, with the housing market expected to slow in coming months, though economic growth could be stronger than the central bank expected.

ASB Bank chief economist Nick Tuffley said he continued to expect the first rate rise in March, and hit a peak of 4 per cent by the end of December 2015.

ANZ economists expected three rate moves of 25 basis points each in early 2014 and more the next year.

"The bank will increase the OCR as needed in order to keep future average inflation near the 2 per cent target midpoint," Reserve Bank governor Graeme Wheeler said today.

The central bank also said today that the high New Zealand dollar was not "sustainable" in the long run and was a particular headwind to the export sector.

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The kiwi rose after the statement came out, up from about US82.3c to about US82.8c, before edging back down to US82.5c.

The exchange rate remained "very high" and had been higher than it had expected in September, driven up by strong terms of trade and a better economic growth outlook than our trading partners, the bank said.

The monetary policy statement predicts the 90-day interest rate will rise over the next few years "by slightly more" than expected in September, from about 2.7 per cent now to 4.8 per cent by early 2016.

That suggests short-term interest rates will rise more than 200 basis points over that period, pushing up mortgage interest rates.

Wheeler said the economy was estimated to have grown at more than 3 per cent in the year to September and "the expansion in the economy has considerable momentum".

However, economic growth was expected to start losing steam from early 2015, slowing to an annual growth rate of about 2 per cent that year.

The terms of trade are at a 40-year high, reflecting booming commodity export prices, especially for dairy products. Household spending is up and construction is rising because of the Canterbury earthquake rebuild and a response to the Auckland housing shortage.

But Wheeler said government belt-tightening and a high New Zealand dollar would partly offset the strength of domestic demand.

"The high exchange rate is a particular headwind to the tradeable sector and the bank does not believe it is sustainable in the long run," he said.

Annual inflation rose to 1.4 per cent in the September quarter and inflation pressures were expected to increase. Until recently, annual inflation has been below 1 per cent for a year.

- Fairfax Media

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