Interest rates may lift up to 5 times

JAMES WEIR
Last updated 05:00 10/03/2014

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The Reserve Bank may lift official interest rates as much as five times this year, with the first move kicking off on Thursday, according to a Westpac forecast.

Central bank governor Graeme Wheeler is widely expected to lift the official cash rate from 2.5 per cent to 2.75 per cent this week.

That will make the Reserve Bank the first developed world central bank to lift interest rates this time round, though economists say that is already factored into the high New Zealand dollar.

Floating mortgage rates are now about 5.75 per cent, so borrowers could face rates approaching 8 per cent in a couple of years.

Two and three year fixed rates have already moved up in the last couple of months to around 6.3 per cent and 6.6 per cent respectively.

A large proportion of people are on floating or short-term mortgages, but the tide has started turning as more borrowers look for fixed term rates, to shelter from expected rate rises.

ASB Bank said a 25 basis point rise was "as close to a certainty" as you get in forecasting, though further rate rises were likely to be fairly gradual, with pauses along the way. There may be no commitment to raise rates again in April, but it was likely, ASB said.

Official interest rates have been at extreme lows of just 2.5 per cent since early 2009, aside from a small lift in 2010, reversed in early 2011. That has seen mortgage rates at their lowest levels for about 50 years, in the wake of the global financial crisis.

Westpac says this week will be the start of the journey back to more normal interest rates "after several years of economic underperformance, false starts and major setbacks".

Westpac expects a series of rate rises over coming years to head off inflation pressures created by a growing economy and the Canterbury rebuild.

The Reserve Bank is expected to make it clear that it will follow up with more rate rises after this week's move, Westpac said. Westpac senior economist Michael Gordon said they expected rates to rise 125 basis points this year.

Bank of New Zealand expected economic growth of just more than 4 per cent this year and 3.5 per cent next year- with 2015 much stronger than earlier expected, reflecting the big gains in net migration and consumer spending.

In December, the Reserve Bank signalled interest rates would rise 200 basis points to 4.5 per cent by the end of 2015.

This week's statement will show if that assumption is repeated or even more rate rises are in prospect, given super-high business confidence and strong commodity export prices.

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FUNDAMENTALS THE GOOD NEWS:

Business confidence is at a 20-year high, pointing to growth of 4 per cent or better.

Fonterra lifts milk price payout to $8.65 a kg, up 35 cents.

Commodity prices for dairy and forestry products are high.

Farm production has rebounded from last summer's drought.

Strong jobs growth in the past six months.

January net migration: 3100, a 10-year high. Annual net migration 25,700.

Building consents, slipped in January, but trend is at a seven-year high.

But inflation remains low at 1.6 per cent and unemployment high at 6 per cent.

THE HEADWINDS:

High New Zealand dollar (US84.8c and A93.2c)

Many parts of the central and northern North Island are now drier than they were this time last year in what was the worst drought in 70 years, says Beef & Lamb NZ.

Official interest rates to rise from 2.5 per cent to 4.5 per cent or higher over two years.

THE WILD CARDS: CHINA AND RUSSIA

Late last year, Reserve Bank governor Graeme Wheeler said: "The biggest risk [for New Zealand] is if anything happened to the Chinese economy."

Russia looks set to annex Crimea: Late last week, Ukraine lurched toward breakup as lawmakers in Crimea unanimously declared they wanted to join Russia. 

- BusinessDay.co.nz

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