Interest rates still to peak
The top's probably not far off, but expect to see some further increases in interest rates.
Tuesday, November 28th 2000, 1:01PM
by Paul McBeth
The Reserve Bank will most likely tighten interest rates in the first half of next year, according to Deutsche Bank.
Fixed Income Strategist David Plank says that economic growth in 2001 is generally expected to be greater than this year and should be "robust enough to lessen concerns that a further tightening will lead to an economic collapse".
In a research report just released, Plank says that the inflation outlook is the key to assessing the RB's likely monetary policy. However, he says the possibility of a sharp slowdown in the US economy could give the Bank reason to pause.
"The judgement call for the RB to make is whether the prospects for a US hard landing are sufficiently high to offset the concern about the level of inflation pressure in the economy.
"At this stage, we think not."
Meanwhile, ASB Bank Senior Economist Rozanna Wozniak says the RB faces a dilemma, given the soft domestic economy and an uncertain outlook for underlying inflation. However, she says that ASB Bank is more optimistic than some forecasters.
"We believe that, during the next 12 months, it will become clear that any increase in underlying inflationary pressures will be both modest and temporary, opening the way for the Official Cash Rate to edge lower during late 2001."
In the bank's latest housing confidence survey, Wozniak says this interest rate outlook opens up several options for borrowers.
"Firstly, there is still some benefit to be gained from locking in for a short period of time, not only because floating rates are likely to rise during the next six months but also because short-term fixed rates are already the cheaper option of the two.
"Alternatively, a combination of floating and short-term fixed rates is also worth considering, depending on your personal circumstances eg the likelihood of making lump sum repayments. The more risk averse you are, the bigger the proportion of your loan that you will probably want to fix and the longer the likely length of your fixed term."
The Reserve Bank's next Monetary Policy Statement and OCR review is in a week's time, on December 6.