Interest rate rises likely to be delayed

All the economists at the major mortgage lending banks are in a rare state of unanimity: they all think the rise in the New Zealand dollar has been sufficient to prevent the Reserve Bank from raising interest rates later this month.

Friday, January 16th 2004, 6:44AM

by Jenny Ruth

After the RBNZ’s December Monetary Policy Statement, most economists thought a rate hike at the end of January was a virtual certainty. However, the New Zealand dollar has risen a further 4 US cents to 68 cents since then.

"We have to recognise that the ongoing strength in the currency could delay, limit or even completely forestall the need for higher interest rates," ANZ chief economist David Drage says.

ASB Bank economist Kate Skinner notes that the increase in the currency since the MPS is equivalent to a percentage point rise in interest rates in terms of its likely impact in slowing economic activity.

"We do not believe the Reserve Bank will lower interest rates on the implicit tightening caused by the currency appreciation. However, we no longer expect the Reserve Bank to begin a tightening cycle on 29 January. The rapid New Zealand dollar appreciation also puts a question mark over a rate increase in March."

Bank of New Zealand economists note that although the current consensus view is that the currency will start to fall in the latter part of this year, "it is worth noting that periods of overvaluation (and undervaluation, for that matter) can often last for a lot longer than people expect."

They think the New Zealand dollar could easily go through 70 US cents soon and that no substantial turning point is imminent.

Westpac notes that the dollar isn’t far off its previous highs of 72.7 US cents in June 1998 and 71.7 cents in November 1996.

It thinks the wholesale interest rate market is pricing in a higher peak in rates than is likely to eventuate, suggesting that new borrowers would be better of with floating rate mortgages. "Those looking for fixed-rate security are paying a bit of a premium, especially at terms greater than two years."

For all the latest Mortgage Rates go to http://www.goodreturns.co.nz/section.php?CategoryID=200

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