OCR rises, mortgage rates may not

The central bank’s official cash rate (OCR) has risen from 5.25% to 5.5%, the third 25 basis point rise this year.

What effect today’s move will have on floating mortgage rates isn’t certain. After the first OCR rise, the five major banks raised their floating rates 50 basis points from 6.7% to 7.2%. After the second rise, they raised their floating rates 30 points to 7.5%.

The key 90-day bank bills, from which floating mortgages are priced, actually fell in the first half hour after the announcement from 5.82% to 5.77%. Floating rates tend to be between 150 and 200 basis points above the 90-day bank bill rate.

One economist says floating mortgage rates may not rise at all. When the last increase occurred back in April, the 90-day bank bill rate was trading about 5.75%, he says.

"The pressures are no where near as great as they were in March, because the market has anticipated a lot of the moves," he says.

Nevertheless, the tone of today’s statement suggests the Reserve Bank may be more worried about inflation pressures than the 25 point OCR increase suggest.

Delivering the first monetary policy statement since long-serving governor Don Brash resigned to adopt a political career, Carr says the economy no longer needs the degree of stimulus that seemed necessary late last year.

Certainly, the OCR is still below the 5.75% level it stood at before the 11 September terrorist attacks.

"The economy’s ability to meet increasing demand without pressure on costs, margins and therefor prices appears limited," Carr says.

Core inflation is still at the upper end of the central bank’s zero to 3% target range, "leaving little headroom for price pressures to accelerate from here on," he says.

Pressures on the nation’s resources look likely to be maintained in the foreseeable future with the population expanding rapidly due to the sharp turnaround in migration, he says.

"Migration is contributing more to strong household spending, residential construction and housing market activity than it is to the availability of labour."

Although the recovery in global demand remains fragile in some aspects, it is underway and concensus forecasts are more optimistic than earlier this year.

Carr also gives reasons for not raising the OCR as much as some economists thought warranted.

"The influences on inflation are not all operating in the same direction. The exchange rate has been rising and international prices for some key exports, such as dairy products, have fallen sharply," he says.

If these factors are sustained, they will reduce domestic activity to some degree and help dampen inflation pressures.

Carr also warns further increases in interest rates appear likely later this year, "possibly to a greater extent than we projected in March."