Reserve Bank holds interest rate

20:19, Jan 29 2014

The Reserve Bank is holding official interest rates at 2.5 per cent, but flagged an interest rate rise is just around the corner.

The central bank says it "remains committed" to increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point. The scale and speed of the rise in the OCR will depend on future economic indicators.

"While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years. In this environment, there is a need to return interest rates to more-normal levels. The Bank expects to start this adjustment soon," Reserve Bank governor Graeme Wheeler said.

The Reserve Bank issued its one page review of the official cash rate at 9am.

The cash rate is sitting at a record low 2.5 per cent, and before today's announcement, financial market pricing suggesting a move was a close "50/50" call, with some bank economists expecting a rise.

Others such as Westpac and ASB have expected rates to remain unchanged this week, but for the Reserve Bank to flag a rise in six weeks time at the March Monetary Policy Statement.

Stronger than expected inflation figures out last week meant that a possible rate rise this week has become "a close call".

The New Zealand dollar was trading at US82.6 cents shortly before the Reserve Bank's announcement, briefly dipping then bouncing back after an announcement from the US Federal Reserve.

The Australian dollar has fallen back below US88 cents after the US Federal Reserve announced further tapering  of its monthly bond purchases. Just over an hour ago, the Federal Reserve said it would cut its monthly bond purchases by an additional US$10 billion (NZ$12.2b) to US$65b because of a strengthening US economy. It's doing so even though the prospect of reduced Fed stimulus and higher US interest rates has rattled global markets.

Expectation that official interest rates are going up this year has already seen longer term mortgage rates jump, with three-year rates looking the best bet for borrowers, according to a BNZ economist.

The floating mortgage rate is presently about 5.74 per cent but Bank of New Zealand economists expect it to hit 6.25 per cent before the middle of the year and near 7 per cent by the end of the year, as the Reserve Bank pushed up the cash rate.

The Reserve Bank's last report in December implied four or five interest rate rises this year, starting in March of April.

But since the end of last year, three year fixed term mortgage rates have already jumped from just under 6 per cent to about 6.4 per cent.

In March, a rate rise would be backed up by a five chapter booklet, detailed economic forecasts, a press conference and an appearance before Parliament's Finance and Expenditure Select Committee. Today's announcement was just a one page statement.

The Reserve Bank governor Graeme Wheeler is due to give a regular speech in Canterbury tomorrow.


Fairfax Media