Good news for borrowers

Homeowners can look forward to stable mortgage rates through to the end of next year, according to Reserve Bank forecasts.

And most economists expect there’s more risk that interest rates will fall next year than that they will rise.

As expected the central bank left its Official Cash Rate (OCR) unchanged at 5.75% and it says that its sense of the risks for the future are evenly balanced.

Releasing his first Monetary Policy Statement, governor Alan Bollard says the current OCR setting is consistent with his target of keeping inflation to between 1% and 3% on average over the medium term.

"In essence, strong domestic demand is expected to be offset by offshore developments, keeping inflation pressures in check," Bollard says.

While the New Zealand economy and inflation pressures are strong, the soft global economy, declining commodity prices and the rising New Zealand dollar mean both should subside somewhat, although perhaps not immediately, he says

Ulf Schoefisch, chief economist at Deutsche Bank, says Bollard’s statement was carefully balanced and pitched in a way to minimise the chance of the market starting to price in an easing in interest rates.

"There’s always a risk when you project slowing growth that the market automatically assumes this will be associated with lower interest rates sooner or later," Schoefisch says.

Bollard countered that tendency by highlighting how very strong is the starting point of the current economic situation, he says.

"My personal view is still that if something develops in a different way from what the bank describes today, the risk is greater that interest rates will be lower rather than higher," he says.

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