Reserve Bank unlikely to raise interest rates

JAMES WEIR
Last updated 05:00 24/07/2013

Relevant offers

Money

IRD collects $40 million after Kiwis dob in tax evaders Yuletide shopping picks up More families opt to stay at holiday parks Gareth Morgan Investments first to get new licence Online sales growth slows New year mortgage war tipped Chrisco contracts challenged in Aust courts Online sales growth slows Online Christmas shoppers caught out by duty rules A Kiwi economic decision that changed the world

The recent lift in fixed mortgage rates and a still-modest fall in the exchange rate are expected to take the gloss off the case for an early rise in official interest rates, according to Westpac economists.

The Reserve Bank's review of official interest rates, due out tomorrow morning, is expected to see rates held at 2.5 per cent again, even though markets are "champing at the bit to price in hikes", Westpac said.

There had been a radical change in market sentiment in recent weeks, moving to price in three rises in the official cash rate by the end of 2014. That reflected the drop against the US dollar, and a growing set of figures showing the economy is "firmly" in the grip of an economic upturn.

The improving economy would push inflation up in time, but a high dollar had suppressed inflation in the short-term.

But Westpac chief economist Dominick Stephens said there were other factors to consider that would take the gloss off the case for an early rate rise.

While the currency had dropped sharply against the US dollar, from US86c in April to about US80c yesterday, the fall was not so significant measured against the TWI, a basket of trading partner currencies.

The New Zealand dollar has risen sharply against the Australian dollar, to A86c, from less than A80c at the start of the year.

So overall, the TWI was only 4 per cent lower than the Reserve Bank expected in June.

The Reserve Bank would probably note the dollar had fallen, but also complain that it remained overvalued, Westpac said.

As well, fixed mortgages have risen by 15 to 25 basis points in recent weeks, which would "weigh" on the housing market, so reduce the need for the Reserve Bank to lift rates.

The Reserve Bank and most other economists had also long expected a lift in economic growth because of the Canterbury rebuild, so now that it had finally arrived there was no cause for the central bank to change its view about future monetary policy, Westpac said.

HSBC economists said while the Reserve Bank would hold rates this week, the next move would be up and may come around the end of the year, as the economy picked up and inflation pressures rose.

HSBC forecast the cash rate to rise to 2.75 per cent in the December quarter and reach 3.50 per cent by the end of 2014, pushing up short-term mortgage rates about 100 basis points, with more later.

HSBC has revised up its forecasts on economic growth and now expects growth of 3 per cent this year and 2.8 per cent next year.

Ad Feedback

- The Dominion Post

Special offers

Featured Promotions

Sponsored Content