Mortgage rates unlikely to rise this year

Homeowners can be reasonably confident interest rates won’t rise this year and they can even hope for a rate cut following today’s Reserve Bank statement.

Thursday, January 23rd 2003, 11:09AM

by Jenny Ruth

Governor Alan Bollard left the bank’s Official Cash Rate (OCR) unchanged at 5.75%, as everyone had expected, but signalled that the sharp rise in the New Zealand dollar since November has shifted the balance of probabilities in favour of a rate cut.

The New Zealand dollar is about 6.25% higher than the central bank was forecasting in November.

"The bank has basically moved to an easing bias. Back in November it said the next move in the OCR could be either way," says Deutsche Bank senior economist Darren Gibbs.

The wholesale interest rates market lost no time in expressing its interpretation of the statement. The June 90-day bank bill futures shifted from implying a 5.63% rate by June before the statement to implying a 5.55% rate immediately afterwards.

If the currency’s rise is sustained, "we expect the higher exchange rate to dampen future economic activity and, hence, medium-term inflation pressures," Bollard says.

Nevertheless, he does note that current domestic economic activity appears more robust than expected, particularly in the areas of household spending and the construction sector.

"The latest estimates suggest that domestic inflationary pressure has continued, offsetting a fall in imported inflation," Bollard says.

Despite this, "the balance of risks around the future path of interest rates has shifted. If the exchange rate remains at around present levels or appreciates further, and if the evidence points to reduced pressures on resources and medium-term inflation, then there may be scope for a cut in the OCR later in the year," he says.

Even the current market "hawks" are taking the statement as a dovish signal. ANZ Bank chief economist David Drage had been forecasting an OCR rise later this year but is now reconsidering that expectation.

He warns against counting on a rate cut. "It’s important to recognise that’s a heavily caveated possibility," Drage says. "It will be contingent on the direction of the currency and particularly on whether that translates into actual evidence of reduced inflation pressures."

"The jury’s still out on that front," he says.

« NEWSFLASH: Cash rate unchanged

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