Opinions divided on OCR increase

The Reserve Bank is due to review its Official Cash Rate on Wednesday, but opinions are divided on whether there'll be an increase.

Sunday, January 16th 2000, 12:00AM

by Paul McBeth

The Reserve Bank is due to review its Official Cash Rate on Wednesday, but opinions are divided on whether there'll be an increase.

The Bank whacked up the OCR from 4.5 per cent to 5.0 per cent last November, prompting a series of mortgage rate rises for homeowners. Floating rates moved up as high as 7.25 per cent, compared with a 6.75 per cent average for trading bank rates previously, while one year fixed rates jumped from a 6.30-7.35 per cent range to 6.80-7.50 per cent.

Real Estate Institute President Max Oliver said the impact on mortgage rates of the last RB move had been "immediate and upward".

"Already, many homeowners are committed to mortgage interest rates some five to six per cent higher than the inflation rate," Oliver said.

"So, with some lending organisations forecasting an OCR of seven per cent by the end of the year, it seems that homeowners may be in for a sustained period of mortgage rate increases."

Recent GDP figures that were significantly higher than most analysts and the RB were expecting prompted Deutsche Bank to pick heightened market anticipation of a rise in the OCR at this review.

However, Deutsche Bank said its central scenario remained for the RB not to make any changes until its March review (which coincides with the March Monetary Policy Statement), raising the rate then to 5.5 per cent.

So, it's not if but when on the rates rise and the same goes for mortgage rates too. The common pick is for floating rates to peak around 9.0 per cent later this year or early 2001. Short-term interest rates are also expected to rise, thanks to the strengthening economy, so that the gap between both floating and short-term rates and the longer-term mortgage rates will narrow.

Sovereign's director home loans Paul Bravo said home buyers should think carefully before fixing all of their loan as it could be a costly mistake. "A real alternative might be to split the loan instead". He said it was quite possible that floating mortgage rates wouldn't increase more than 2.25 per cent above their current levels (Sovereign's is 6.95 per cent) in the next two years and that was only slightly above the trading banks' average three-year rate of 8.70 per cent.

Meanwhile, in the most recent New Zealand Observer, BNZ Chief Economist Tony Alexander said his personal preference remained for fixing most of his loan for two years with a bit on floating, "then floating after that looking for the next cyclical low in fixed rates".

Paul is a staff writer for Good Returns based in Wellington.

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