Economic news points to higher rates

Weekly Home Loan report: The message on home loan rates is still the same - there won't be any falls for sometime now.

Wednesday, June 28th 2006, 8:50AM

Since our previous home loan report the likelihood of more rises, not cuts has emerged.

As one economist noted: "The upward pressure on interest rates has still not completely passed."

The problem which exists is that the country's economic growth rate has slowed, exactly what the Reserve Bank's hikes in interest rates set out to achieve, however inflation is still high, sitting at around 3% annually and expected to stay around this level for the next couple of years.

The central bank has taken the view that it will keep its Official Cash Rate at 7.25% for the foreseeable future and cuts are possible around the second half of next year.

However, if it doesn't stick to this plan and decides it needs to tackle inflation then there is the prospect of rates going up again.

In the home loan market we are likely to see the floating rate and short-term rates follow the pattern of what is happening in New Zealand.

In the longer term market rates will follow what is going on overseas - and that is a different story altogether following comments from United State Federal Reserve chairman Ben Bernanke. He rocked markets with recent comments on inflation, and since then expectations for US monetary policy have shifted dramatically.

A rate hike this week is viewed as a done deal. Another monetary tightening in either August or September is also expected.

That means longer term rates in New Zealand will almost invariably rise.

During the past week the trend has been for rates to keep increasing. Amongst the banks ASB, Bank Direct and TSB have increased their rates.

ASB increased most of its rates by 5 to 30 points - although its 2-year rate remains the same and its 5-year rate decreased by 5 points. Bank Direct increased all fixed rates by 5 to 20 points and TSB's 3 to 5 year rates increase by 10 to 15 point.

There has also been plenty of action in the non-bank lending sector with increases of 10 to 25 points. To see all the increases click here.

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