Official interest rate rises to 2.75 per cent

21:27, Mar 12 2014

Poll: The Reserve Bank is lifting official interest rate from 2.5 per cent to 2.75 per cent, with more rises to come.

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The increase this morning kicks off what is likely to be an extended run of rate rises over the next two years, with economists expecting the next increase in April.

Floating-mortgage rates are now about 5.75 per cent, but could rise to about 8 per cent in the next couple of years, or more, if the Reserve Bank moves the official rate as much as expected.

Some economists say borrowers could face rises of as much as 150 basis points this year alone, with more to follow in 2015.

If the official raterises 1 percentage point by the end of this year, that will add another $20 a week for a family for each $100,000 they borrowed, the economists say.

New Zealand is the first developed country in the world to lift interest rates in recent times, although economists say that is already factored in to the high New Zealand dollar. The currency was at US84.7 cents late yesterday, before the announcement.

Economists say higher interest rates are needed to head off inflation pressures and to moderate demand for housing in Auckland.

And rate rises are expected to "pack a punch," economists say, with most outstanding mortgage lending on floating or short-term loans.

That means hikes will be passed straight through to borrowers.

Higher interest rates will temper household spending and business investment.

Some economists have recommended borrowers shift some of their loan to a three-year term now at about 6.35 per cent interest.

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 themselves from expected rate rises. A swift rise in rates could prompt a rush for fixed rates.

Many first-home buyers who have been squeezed out of the market by Reserve Bank low-deposit loan rules imposed last year, will face much higher interest rates by the time they have saved a bigger deposit.

The Official Cash Rate has been at an extreme low of just 2.5 per cent since early 2009, apart from a small lift in 2010 that was 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.

In December, the Reserve Bank signalled that the interest rate would rise 200 basis points to 4.5 per cent by the end of 2015. That would see rates around "neutral" levels, neither speeding up nor slowing down the economy.

But some economists say the cash rate could top 5 per cent by then, pushing floating mortgage rates to about 8.5 per cent.

In the last period of extended interest-rate rises before the global financial crisis, the Official Cash Rate peaked at 8.25 per cent in 2007, with average floating mortgage rates at almost 11 per cent.

* Watch Reserve Bank Governor Graeme Wheeler announce the Reserve Bank Monetary Policy Statement and Official Cash Rate review below: