Floating rate predictions

After each OCR we survey economists for their view on where interest rates and home loan rates will be heading in the future.

Friday, May 13th 2011, 11:19AM 1 Comment

Since borrowers are heavily favouring floating rates at the moment we thought it would be worth showing you what economists are predicting here.

Their predictions, as you would expect, mirror their views for the OCR.

Infometrics is picking the biggest and fastest hikes. It suggests the variable rate will bet up around 9% by late 2013.

Other economists have the rate going up to just under 8% which is well below the peak hit in the previous interest rate cycle.

Infometrics managing director Gareth Kiernan doesn't expect the first OCR increase will come until March next year.

Most economists agree although a couple suggest December.

In terms of the speed of increases during 2012, Infometrics are at the top end. Its view is based on:

Mounting inflation pressures as the rebuild in Christchurch gets underway and stretches capacity in some parts of the economy (eg construction sector)
A rebound in the housing market as the under-build of the last few years starts to influence prices - particularly in Auckland
A flow-through of the current strong export incomes to stimulate a marked pick-up in broader economic activity next year
A higher international inflation environment as well
Not all increases in the OCR being passed through into retail rates on a one-for-one basis - ie we expect the margins between wholesale and retail rates to shrink once interest rates return to more "normal" levels, somewhat reducing the effectiveness of moves to tighten by the Reserve Bank.

"Although we can understand the Reserve Bank's current approach to setting monetary policy and wanting to make sure that a robust economic recovery is embedded before they start to tighten monetary policy again, we see potential for this approach to lead to inflation problems next year and necessitate a pretty rapid tightening by the bank to try and keep price pressures under control," Kiernan says.

"We might be wrong in that view, but if we are, it's likely to be because we've overestimated the acceleration in growth (although our GDP forecasts for 2012 are not too far off the market average at this stage)," he says.

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