Interest rates could fall during the OCR pause

Interest rates could fall further than the Reserve Bank is comfortable with after the latest OCR announcement, economists say.

Friday, July 25th 2014, 11:10AM

Governor Graeme Wheeler hiked the OCR 25 basis points to 3.5% and made it clear that the bank expects to leave it there for a while. “It is prudent that there now be a period of assessment before interest rates adjust further towards a more neutral level,” he said.

Westpac’s economists said the pause signal had been expected. But they said they sensed a market overreaction, and that interest rates could fall.

“Whereas the RBNZ intends this to be a hiatus within a broader trend of a rising OCR, markets are starting to doubt the entire nature of the hiking cycle,” they said.

They said the risk was that fixed mortgage rates would fall to levels that the RBNZ would be uncomfortable with, and it would have to “correct” market pricing.

ASB said it expected the pause to last until December. But its economists agreed Wheeler’s clear message could have repercussions. “The RBNZ was a little bit more explicit than we thought it would be given the real risk of an explicit pause signal triggering an unwanted drop in wholesale rates.”

But JP Morgan economist Ben Jarman said Wheeler had not wavered at all from the conviction that more hikes would still be necessary. He said what the bank would consider neutral was still 100 points (1%) away. He said it was likely that the next increase in the OCR would come in December, “which would represent a two-meeting, five-month break in between hikes”.

HSBC’s economists said they expected another rate increase before the end of the year.

Wheeler also said that immigration was adding to housing and household demand, although house price inflation had moderated since the OCR was last reviewed in June. "It is important that inflation expectations remain contained. Today's move will help keep further average inflation near the 2% target midpoint and ensure that the economic expansion can be sustained. Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year."

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