OCR rises, more hikes expected

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Reserve Bank governor Alan Bollard raised interest rates as expected, ensuring floating mortgage rates are on the way up.

Thursday, June 10th 2010, 10:03AM 1 Comment

by Jenny Ruth

Bollard raised his official cash rate (OCR) from 2.5% to 2.75%, citing a second year of the economy improving with growth becoming more broad-based, although he expects the household sector to remain relatively cautious.

It's the first change to the OCR since April last year.

Bollard is "signalling it's only the start of normalising interest rates," says Brendan O'Donovan, chief economist at Westpac. While the OCR has a long way to go to return to more normal levels, Bollard has indicated he's very open to letting events determine how fast the OCR moves up, he says.

The central bank is "trying to weigh up the relatively weak consumer against a strong external sector, partcularly strong commodity prices," O'Donovan says. At the same time, it is also trying to moderate the financial market response. "They're saying we will be doing further hikes but let's not get carried away in terms of pricing in a really aggressive cycle."

Bollard said the most likely impact of recent turmoil in European economies is higher bank funding costs. That and the fact long-term interest rates are higher than short-term rates and a greater proportion of home-loan borrowers using floating rate mortgages should reduce the extent to which the OCR needs to rise, he said.

Nick Tuffley, chief economist at ASB Bank, says Bollard highlighted three things: underlying inflation is likely to remain under control, even thought government policy, including raising GST, means headline inflation will rise very sharply; he expects households and businesses to continue to focus on rebuilding balance sheets; and he expects the global economy to continue to look "pretty rosy."

"It strikes me if the economic recovery continues to track along as expected and global financial markets don't implode again, they're going to continue to raise rates," Tuffley says.

Chris Green at First NZ Capital says the tenor of today's statement suggests another 25 basis point rise in the OCR in July. "A gradual removal of stimulus is on track at the moment," with the big question remaining of how the global economy will evolve.

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