Wheeler lifts interest rates

JAMES WEIR
Last updated 05:00 14/03/2014

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Interest rates are set to rise 2 per cent over the next couple of years and possibly more, with the Reserve Bank warning borrowers that house prices will cool and are not a one way bet to go up.

The central bank yesterday pushed up official interest rates from 2.5 per cent to 2.75 per cent, in what is expected to be a long run of rate rises over the next two years, by a total of 250 basis points, with the next expected in April.

The official cash rate is set to top 5 per cent by early 2017, pushing up floating mortgage rates to about 8 per cent or more.

ANZ Bank pushed up its floating rate to just under 6 per cent yesterday.

But some economists say the high New Zealand dollar and the potential for rising rates to hit quickly could see a more cautious approach. More than 70 per cent of borrowers are on floating or fixed rates of less than a year, so rising interest rates will pack a punch.

It is also possible the Reserve Bank may pause from raising rates in early September just days before the general election.

Green co-leader Russel Norman said some households were facing rapidly rising power bills, higher rents and now mortgage rates were going up.

"How do you expect those households to respond to the pressures on their capacity to pay their bills?" Norman said at a select committee hearing at Parliament yesterday.

Reserve Bank governor Graeme Wheeler said that the aim of lifting interest rates now, was to "sustain this recovery for as long as possible".

"Central banks are often cast as taking away the punchbowl when things get interesting, when the party gets swinging," Wheeler said.

"But people should not forget that the Reserve Bank spiked the punch to get this party going - to get the recovery underway we reduced interest rates to the lowest levels in 50 years."

And rates were going up for the first time in five years, to keep inflation under control, so business competitiveness would not get eroded and real incomes were not destroyed by rising inflation.

The Reserve Bank is expecting annual house price rises to slow down "quite a lot", dropping to about 4 per cent in a couple of years, compared with more than 8 per cent now, in part reflecting limits on low deposit loans brought in last year.

With rising interest rates, Wheeler agreed that house buyers could no longer see house prices as a one way bet to go up: "I think that's right."

Most large economies had suffered at least one serious house price fall since the 1980s, but New Zealand had not, aside from a little drop after the Global Financial Crisis.

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New Zealand house prices had risen the fastest of any OECD country in the mid-2000s.

"It wasn't in anyone's interest to see house prices going along at that rate," Wheeler said.

Auckland house prices are 32 per cent above the 2007 peak and nationally 15 per cent above that peak. Warning of the risk of house prices dropping, Wheeler said : "If China did get into serious difficulty at any point, the reverberations in Australia and New Zealand would be extremely significant." It will be the first time in five years that interest rates have risen significantly and recent home buyers will not have faced rising interest bills ever before.

Many potential first home buyers were forced out of the market by new rules limiting low deposit loans late last year. And they will now face increasing interest rates as they try to save a bigger deposit. But the Reserve Bank says banks have cut back so hard on such lending in recent months, there is actually scope for more low deposit loans.

"While some first home buyers may feel crowded out of the market, we feel there were some systemic issues, in terms of risks to banking system if we have house price inflation galloping away," Wheeler said.

KEY POINTS

Official interest rates rise from 2.5 per cent to 2.75 per cent.

Rates expected to rise 2 percentage points in the next two years, and maybe more later.

Floating mortgage rates to rise from 5.75 per cent to about 8 per cent in two years.

More than 70 per cent of borrowers on floating or fixed rates of less than a year, so rate rises will hit fast.

- BusinessDay

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