OCR could stay flat till 2014

HAMISH RUTHERFORD
Last updated 05:00 14/09/2012
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Households look set to enjoy record-low interest rates for at least a year, with the Reserve Bank signalling a low official rate could be in place into 2014.

In his final official cash rate decision, Alan Bollard, who is stepping down later this month as governor after more than a decade, said the bank's own forecasts were for interest rates to be stable for another year.

Three months ago the central bank indicated that the OCR, which has a direct influence on mortgage and deposit rates, would begin increasing around June 2013.

There was little reaction from the financial markets yesterday, with suggestions the delay reflected only a stronger New Zealand dollar – but the news looks good for mortgage holders.

Economists at Bank of New Zealand pushed out when they expected the OCR to begin rising by six months to December 2013.

Last week ANZ said interest rates could be on hold into 2014.

Both banks have acknowledged that there is a chance that the OCR could be cut, particularly if a slowdown in China starts hurting Australia, New Zealand's largest trading partner.

BNZ head of research Stephen Toplis said though retail spending and the housing market were heating up, a high exchange rate, weak manufacturing figures and low consumer confidence all suggested a cut could be in order.

"It's very much a tightrope at the moment where it could go either way."

Bollard said he did not see signs that the market expected rates could be cut.

The OCR was reduced to a record low of 2.5 per cent during the recession of 2008-09, to help stimulate consumer spending.

After being raised to 3 per cent in early 2010, the OCR was cut back to 2.5 per cent after the September Christchurch quake.

Since then expectations of when interest rates would be hiked have been progressively moved back.

Yesterday, Bollard signalled that the strong New Zealand dollar, while hurting exporters, was helping keep inflation "low", allowing rates to be left lower for longer.

Cutbacks in government spending, and a move by households to pay off debt faster than before the global financial crisis, were also allowing it to maintain interest rates at a level it had previously said was "stimulatory".

Not all of the banks agree that interest rates will be held as low for as long as the outgoing governor predicted, with uncertainty on how Graeme Wheeler, Bollard's replacement, will view monetary policy.

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Dominick Stephens, chief economist at Westpac, said that there were already signs that housing activity and prices were rising, and continued low interest rates would only cause pressure to increase.

"With these low interest rates he [Wheeler] will be facing a steadily warming, bordering on hot, housing market by early 2013," Stephens said.

INFLATION TARGET RIGHT WAY TO SET RATE, SAYS BOLLARD

A Bollard is defending the mechanism used to determine interest rates, calling it "completely fit for purpose".

Currently the bank's main focus when determining what the Official Cash Rate (OCR) should be is inflation, with a target of 1 per cent to 3 per cent over the medium term. Opposition MPs, led by Labour finance spokesman David Parker, have been pressing for broader targets for setting interest rates, to take in the impact of interest rates on employment and exchange rates.

Appearing before the finance and expenditure select committee at Parliament yesterday, Bollard defended the policy.

"The scope that the Reserve Bank Act gives, it's allowed us to deal with a very tight, growing housing market back in the 2000s, it's allowed us to deal with a very nasty financial event back in 2008."

Bollard said the bank had not felt bound by a "strict suit" of inflation targeting, and while he acknowledged not all economists agreed it was the right policy, it remained the "established" position.

"That's the model that's used by I think 23 OECD [countries] and other banks," he said.

- BusinessDay.co.nz

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