Rate rise in March 'a near certainty'

21:18, Jan 30 2014

Higher official interest rates in March are a near certainty, economists say, and borrowers likely to face floating mortgage rates up about 200 basis points over the next two years.

Floating rates are about 5.75 per cent at the big banks, implying mortgage rates could move close to 8 per cent by the end of 2015. Rates were last that high at the end of 2008.

The Reserve Bank yesterday held the official cash rate at 2.5 per cent, but flagged an interest rate rise was just around the corner and said the high dollar was unsustainable.

It "remains committed" to increasing the OCR as needed to keep future average inflation near the 2 per cent 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," governor Graeme Wheeler said. "In this environment, there is a need to return interest rates to more normal levels. The bank expects to start this adjustment soon."

Economists now widely expect the first rate rise from 2.5 per cent to 2.75 per cent on March 13.


One economist said a 50-basis-point jump in rates was possible if unemployment dropped sharply in figures due out next week, or wage rises started to steam ahead. But most think a 25-basis-point move is most likely in March, followed by another three or four moves this year.

It is possible there may be a pause in late October, just before the November general election, but in theory the election should not get in the way of any move.

BNZ chief economist Tony Alexander said the first rate rise would be in March, with the OCR at 3.75 per cent by the end of the year and near 4.5 per cent by the end of 2015. There was the risk rates could go even higher given the political competition for the government to spend more.

Alexander said borrowers should fix their mortgage rates "now", recommending a three-year, fixed rate of about 6.4 per cent.

ASB Bank chief economist Nick Tuffley said a 25 basis point rate rise in March was now a "near certainty", with rates rising gradually to 4 per cent by the end of 2015. That was barring a big external shock or a sudden worsening in New Zealand's prospects.

ASB expected a moderate pace of rate rises, with moves in March, June and December this year, and three more in 2015.

Westpac chief economist Dominick Stephens said the Reserve Bank sent "the clearest possible signal" that it planned to lift the OCR in March.

Waiting till then was the wisest course of action.

"It is now abundantly clear that the economy warrants a higher official cash rate," he said. But to have moved rates yesterday without prior warning and much explanation might have seemed "panicky and high-handed".

The central bank also gave the impression it was expecting a more aggressive set of rises than implied in December.

"Extremely bullish words were chosen to describe the current state of, and outlook for, economic activity in New Zealand," Stephens said.

Concerns about a high New Zealand dollar seemed to have held the Reserve Bank from a rate rise yesterday, according to HSBC, when there was a strong case to raise it now.

The central bank took a jab at the high dollar, which fell more than half a US cent after the rate was held. "The high exchange rate continues to dampen inflation in the traded goods sector, but the bank does not believe the current level of the exchange rate is sustainable in the long run."


Why should interest rates go up?

A building boom: 21,300 new dwellings consented in 2013, up 26 per cent from 2012.

A migration boom: a net gain of more than 22,000 in the past year, adding to spending and demand for housing.

A commodity price boom: export prices "very high", especially for dairy products.

The economy is on a roll, gathering "momentum" and expected to grow 3.5 per cent. Annual inflation is just 1.6 per cent, but inflation pressures are rising, with a risk that rising building costs spill over into wider price rises.


Why should rates stay low?

- Continued government belt-tightening, but election-year promises may slip a notch or two.

- The high New Zealand dollar, which the Reserve Bank says is "unsustainable".

- The global picture is still wobbly, although growth is improving.

Key points:

- Reserve Bank holds official cash rate at 2.5 per cent.

- It warns that the OCR will move up "soon" without setting a date.

- A rate rise in March is now widely expected.

- Official cash rate may be 3.5 to 4 per cent by the end of this year and 4.5 per cent by late 2015.