Interest rates lifted by Reserve Bank

JAMES WEIR AND NIKO KLOETEN
Last updated 11:10 24/07/2014

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After four rate rises this year, the Reserve Bank looks set to hold the official interest rate (OCR) at 3.5 per cent for the rest of the year before moving again.

Reaction to this morning's rate rise was swift, with ANZ the first bank to increase its floating home loan prices by the full 25 basis points within an hour of the announcement.

And the central bank's warning that the high New Zealand dollar was "unjustified and unsustainable" and could fall significantly, proved true.

The kiwi was thumped after the OCR announcement, falling by almost 1 cent against the US dollar, from US87c to US86c, in a matter of minutes.

The dollar also dropped sharply against the Aussie dollar, from A92.08c to A91.12c, and against other currencies.

However, ASB Bank economists did not think currency intervention was "imminent".

ASB chief economist Nick Tuffley said the Reserve Bank stepped up the rhetoric on the dollar, with the comment about the currency being "unjustified" seen as a tick in the box for possible currency intervention.

"We don't expect the Reserve Bank to intervene despite the comments, but the statement ... should keep the New Zealand dollar heavy in the near term," Tuffley said.

BREATHER, THEN MORE RISES

After today's OCR rise from 3.25 per cent, the central bank said there would be a pause while it measured the impact.

"It is prudent there now be a period of assessment before interest rates adjust further towards a more neutral level," bank Governor Graeme Wheeler said in a statement.

A neutral level for the cash rate, neither pushing the economy ahead nor holding it back, is seen as about 4.5 per cent, still about 100 basis points up from present levels.

Today's increase, which brings the year's total rise to 100 basis points, is expected to push up floating mortgage rates, from levels their present levels of about 6.5 per cent.

Economists have expected a pause to last until December and possibly into next year, as the Reserve Bank waits to see what impact earlier rate moves have had.

ASB expected the next increase would be in December, with the cash rate peaking at 4.5 per cent in late 2015.

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But with Wheeler flagging a return to "neutral" the official cash rate could still rise steadily next year, taking floating mortgage rates towards 8 per cent.

Wheeler said the speed and extent of future rate rises would depend on the assessment of the impact of so far and the implications of future economic and financial data for inflation pressures.

Meanwhile, Business NZ said a "period of stability" for interest rates was now needed, with the past OCR increases running against the picture overseas where rates in the developed world were "near zero".

Business NZ chief executive Phil O'Reilly said "we need to avoid adding pressure on the New Zealand dollar", but it was a balancing act in the face of conflicting pressures.

"The softening in commodity prices on one hand and record net migration on the other makes it difficult to chart a course forward," O'Reilly said.

The Reserve Bank said in today's statement that in recent months, export prices for dairy and timber have fallen, which would cut into primary sector incomes.

With the exchange rate yet to adjust to weakening commodity prices, "the level of the dollar is unjustified and unsustainable and there is potential for a significant fall", Wheeler said.

He said the economy was expected to grow 3.7 per cent this calendar year, but growth among New Zealand's trading partners had eased slightly in the first half of this year because of temporary factors.

In the meantime, construction was growing strongly, especially in Canterbury, and Strong net migration was adding heat to the housing market and to household demand.

However, the central bank noted that house-price inflation had "moderated" further since its June statement.

Annual price rises in the property market have cooled since late last year, after the Reserve Bank started moving up rates, and last year's move to limit low-deposit home loans.

General inflation was still "moderate" but strong economic growth was soaking up spare capacity in the economy, and that was expected to add to domestic inflation.

But Wheeler said it was "important" to keep inflation expectations contained.

Today's move would help keep future average inflation near the 2 per cent target mid-point and "ensure that the economic expansion can be sustained".

So far, inflation has stayed low, at just 1.6 per cent, and he said it was encouraging the economy appeared to be adjusting to the interest rate rises made earlier in the year.

 

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- Stuff

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