OCR set to rise but extent still unclear

20:24, Oct 02 2013

The Reserve Bank assistant governor has given the market an indication of the kind of Official Cash Rate (OCR) rises that could be expected next year.

The shift from floating to fixed-rate mortgages shows Kiwi households already know rates are going to rise next year, but by how much is still unclear.

Speaking to the New Zealand Institute of Chartered Accountants CFO and Financial Controllers Special Interest Group in Auckland yesterday, John McDermott sought to give indications of the kind of rises the market might expect in the OCR, which in turn influences mortgage rates. It is currently sitting at 2.5 per cent.

McDermott said the bank expected to keep the OCR unchanged in 2013, but move it up next year. "We believe 90-day rates have been stimulatory since early 2009, when the OCR was first lowered to 2.5 per cent in the wake of the global financial crisis," he said.

But the question was, he said: "What average might we expect interest rates to head towards when we do eventually start to increase the OCR, and when would we expect to reach that level?"

He did not answer the question directly, instead choosing to expound on what he called the "neutral interest rate", which he defined as the rate which would neither stimulate nor restrict the economy.

McDermott said: "Our projections suggest the level of the nominal 90-day interest rate that achieves this is about 4 per cent."