Reserve Bank holds interest rate
Mortgage rates are poised to rise but homeowners on floating rates have been granted at least another six-week reprieve.
The Reserve Bank this morning kept the official cash rate at 2.5 per cent, but flagged an interest rate rise was just around the corner. The central bank also says the high New Zealand dollar is "unsustainable".
Some economists had predicted the first of a series of hikes today, but now the consensus is for a mid-March movement.
For the 814,000 people still on floating mortgages, that will add a welcome six-week breathing space before rates could start to rise.
Fixed rates have already been rising since mid-2013, in anticipation of interest-rate hikes of 2 percentage points over the next two years.
BNZ chief economist Tony Alexander said today's statement firmed up the bank's forecast for a March rise.
"It makes it clear the Reserve Bank is planning to push the button, and is very close to it," he said.
He said the central bank would probably start any movement tentatively with a 25-basis point hike, because so many people were still on either floating or short-term rates.
However, he did not expect a mass exodus into longer-term fixed rates just yet.
"History ... tells us that people don't start jumping holus-bolus into the three- to five-year rates until the floating interest rate moves up."
ANZ chief economist Cameron Bagrie said he suspected most people would continue to chase down the cheapest rates in the market, which tended to be shorter fixed terms.
He said ANZ expected official interest rates to reach 3.5 per cent by year-end, 4.25 per cent by the end of 2015, and 4.75 per cent by the end of 2016.
If all the hikes are passed into the floating mortgage rate, it could reach 8 per cent by the end of the cycle.
The increase would raise total monthly repayments on a 30-year mortgage by $150 for every $100,000 of mortgage debt.
Householders know low interest rates will not last forever and most are prepared for increases, Finance Minister Bill English said after the RBNZ news.
"Rate rises are expected. People know they've had low interest rates. They're expecting them to go up and most people will have factored that in."
Whether interest-rate hikes ate up wage increases depended on personal circumstances, English said.
"If they've got high levels of debt and they're running at the margin now, that could put them under a bit of pressure, but that will depend on what pay rises they get."
Industry group the New Zealand Bankers' Association issued a statement this morning, warning borrowers to prepare for the hikes now.
"Now's the time to assess your circumstances and get your finances in order so you can manage an increase in the cost of borrowing," chief executive Kirk Hope said.
"This is especially important for first-home owners who have borrowed at very low rates."
Hope said borrowers with any concerns about rate rises should talk to their bank.
RESERVE BANK SPEAKS
The Reserve Bank statement this morning is seen as a clear sign interest rates will now rise in March.
It says it "remains committed" to increasing the OCR as needed to keep future average inflation near the 2 per cent target mid-point. The scale and speed of the rise in the OCR will depend on future economic indicators.
"While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years," Reserve Bank governor Graeme Wheeler said.
"In this environment, there is a need to return interest rates to more normal levels. The Bank expects to start this adjustment soon."
Westpac Bank economists said the Reserve Bank statement gave the "clearest possible signal" that rates would rise in March, by 25 basis points.
"The economic case for hiking the OCR is clear, but the RBNZ is better off waiting for the superior communication opportunity offered by the March MPS [monetary policy statement] before actually pulling the trigger," Westpac chief economist Dominick Stephens said.
The central bank also gave the impression that it was now expecting a more aggressive set of interest rate rise than implied in December.
"Extremely bullish words were chosen to describe the current state of, and outlook, for economic activity in New Zealand," Stephens said.
The central bank also took a jab at the high dollar, which fell more than half a US cent after the OCR was held.
"The high exchange rate continues to dampen inflation in the traded goods sector, but the bank does not believe the current level of the exchange rate is sustainable in the long run," Wheeler said.
The New Zealand dollar was trading at US82.6 cents shortly before the Reserve Bank's announcement, but immediately dropped to just US82c on confirmation that the cash rate was still on hold.
Westpac currency traders said that was unsurprising, given there was some pricing in the market on the expectation that rates would be raised today.
The official cash rate is sitting at a record low 2.5 per cent, and before today's announcement, financial market pricing suggesting a move was a close "50/50" call, with some bank economists expecting a rise. A rate rise had been expected to spark another jump in the currency.
Meanwhile, the Green Party blamed the Government's failure to fix the Auckland housing crisis for predicted interest rate hikes, which it said would hurt the whole economy.
"Higher interest and exchange rates will effectively cost jobs, exports, and raise the cost of living for all those with mortgages," Green Party co-leader Russel Norman said.
"A possible 1 per cent hike in the OCR will raise the average homeowner's interest payments by $70 a fortnight."
This morning the United States Federal Reserve said it would cut its monthly bond purchases by an additional $10 billion to $65 billion because of a strengthening US economy. It's doing so even though the prospect of reduced Fed stimulus and higher US interest rates has rattled global markets.
The Reserve Bank of New Zealand said in its one page statement, this morning that this country's economic expansion had "considerable momentum".
Prices for export commodities were "very high", especially for dairy products, consumer and business confidence were strong, and the rapid rise in net inward migration over the past year had added to consumption and housing demand. Construction was being boosted by the Canterbury rebuild and by work in Auckland to address the housing shortage.
However, that would be partly offset by continued government belt-tightening.
The economy grew 3.5 per cent in the year to September, and growth was expected to continue around this rate over the coming year, the Reserve Bank said.
While agricultural export prices were expected to come off their peak levels, overall export demand should benefit from improving growth in the global economy, the bank said.
However, improvements in the major world economies had required "exceptional monetary accommodation" and there remained uncertainty about the timing of withdrawal of this stimulus and its effects, especially on emerging market economies, the statement said.
Annual inflation was 1.6 per cent in 2013, and forward-looking measures of firms' pricing intentions have been rising.
Construction costs were increasing and risk feeding through to broader costs in the economy.
"At the same time, there appears to have been some moderation in the housing market in recent months," the New Zealand central bank said.
The high exchange rate continued to dampen inflation in the traded goods sector, but the bank did not believe the the exchange rate is sustainable in the long run.