Reserve Bank raises OCR to 5.25%

This time around, Reserve Bank governor Don Brash met concensus expectations and raised his official cash rate (OCR) from 5% to 5.25%, the second rise of the current tightening cycle.

Wednesday, April 17th 2002, 5:41PM

by Jenny Ruth

It remains to be seen how much banks will raise their floating mortgage rates, but borrowers can bet on them at least matching Brash’s move.

Brash says it was clear from the December quarter growth data that domestic demand has been growing strongly.and partial indicators for the March quarter point in the same direction.

"Retail spending has been very strong and house sales suggest a buoyant residential property market. Both business and consumer confidence continue to be high," he says.

While the world economy isn’t nearly as buoyant on average as the New Zealand economy but appears to be continuing a gradual recovery.

"All in all, and given the outlook for inflation, a further moderate adjustment in the OCR seems appropriate," Brash says.

Figures released yesterday showed a 0.6% rise in inflation in the March quarter, below the Reserve Bank’s 0.9% forecast, making the annual increase 2.6%. Nevertheless, the annual rate is expected to move near to or exceed Brash’s 3% target in the current quarter.

It’s likely the major mortgage lenders will at least match Brash’s latest move in the floating rates – after last month’s 25 basis point move, all five of the major home-lending banks raised their floating rates 50 basis points to 7.2%. The banks were playing catch up to the 90-day bank bill rate, from which they fund their floating mortgages and which had risen about 70 points since the last time they had adjusted their variable rates.

WestpacTrust treasury economist Nick Tuffley says while he doesn’t know what his bank will do to its lending rates, bank margins are still under considerable pressure.

"Because we’re still in the early part of the tightening cycle, there’s still a lot of tightening anticipated in very short order," Tuffley says.

Even when the central bank first moved last month, the wholesale market had already priced in today’s move. Now, the market has moved on to fully pricing in a further 50 basis point rise in the OCR when the next monetary policy statement is released on 15 May, Tuffley says.

"The banks have been wearing a much higher cost of funds and they haven’t fully passed it on." Even if they match today’s cut, they will still be behind the market.

On a brighter note, one to three-year fixed rate mortgages are unlikely to change much because the wholesale rates from which those mortgages are priced have only crept up a few points in the past month, Tuffley says.

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