Bank primed to raise OCR again

JAMES WEIR
Last updated 05:00 09/06/2014

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The Reserve Bank is expected to lift official interest rates again this week but may then pause over winter before rates rise again late in the year.

The Reserve Bank has already moved rates up twice this year and is expected to push the official cash rate up again on Thursday to 3.25 per cent.

Floating mortgage rates are already up to about 6.25 per cent and this week's rate rise would nudge them up again.

Economists say the central bank may signal a pause after this week's rate rise, possibly keeping rates steady in July before another rise or two late in the year, but with more to come next year.

Despite the rising cash rate which influences short-term mortgage rates, two-year fixed rate mortgage rates have actually fallen 34 basis points in the past couple of months.

That is because financial markets do not expect interest rates to rise as much as they thought earlier this year.

Westpac Bank chief economist Dominick Stephens said those lower two-year fixed-term mortgage rates could "reignite the housing market".

Latest figures show annual house prices were up 8.2 per cent from May last year, a slower rate of increase than earlier in the year. House sales volumes also dropped heavily, which could be a sign prices will cool even more.

This week, the central bank is expected to repeat its warning that rates will rise sharply in the next couple of years. But the earlier projections for short-term interest rates to rise 200 basis points in total could be cut back as much as 20 basis points, Westpac said.

But financial markets had become more sceptical about how far rates would rise since March, because inflation was lower than expected, the dollar went up and dairy prices fell.

Current market pricing suggests the official cash rate would only be up to 4 per cent by the end of next year, well short of the Reserve Bank's March forecast implying a rate of 4.5 per cent.

The resulting drop in market interest rates would be worrying the Reserve Bank because it had prompted banks to cut fixed mortgage rates, Stephens said.

And the market-driven drop in the fixed rates was not in line with recent economic figures which tended to support the case for rates to go up, not down.

Those factors include a still strong economy, a recently falling exchange rate and an "expansionary" Government Budget.

THE NEXT MOVE

Official cash rate expected to rise to 3.25 per cent on Thursday

Why rates should keep going up: Strong net migration (34,400 net gain in April year) Building boom (16 per cent gain in March quarter)

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Terms of Trade at a 40 year high

Economy set to grow 4 per cent

Why rates should stay low: Annual inflation is 1.5 per cent

Annual wage inflation is 1.6 per cent

Unemployment is still high at 6 per cent

Dairy prices have slumped 26 per cent since February

A high dollar is keeping import prices down

- Fairfax Media

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