'Hike may come sooner than expected'

Borrowers need to be aware that interest rate rises are on the horizon – and may be closer than some have been predicting, commentators say.

Thursday, July 25th 2013, 12:00AM

by The Landlord

Reserve Bank governor Graeme Wheeler today left the official cash rate at 2.5% but indicated that the next move would definitely be up.

His accompanying speech indicated that the pressure to lift the rate was building. There were signs that inflation was rising and could reach the higher end of the 1% to 3% target band over the coming year.

He said construction activity was growing, which would have flow-on effects into the wider economy.

How soon the Bank would raise interest rates would depend on how the housing market behaved. “The extent of the monetary policy response will depend largely on the degree to which the growing momentum in the housing market and construction sector spills over into inflation pressures.”

Wheeler indicated that meant no rise this year but ASB chief economist Nick Tuffley said it could still happen sooner than pundits were predicting – depending on the impact of “spillover” inflation.

“Generally the assessment was unchanged but it was a bit firmer over the potential impact of house price inflation pressures.”

He said the bank was likely worried about new data that showed that construction costs in Auckland had risen sharply. “We’re also seeing retail spending growth gradually gathering momentum. Some of that is down to the housing market.”

Tuffley said the latest statement didn’t change the ASB’s prediction of a March OCR move but seemed to indicate the Reserve Bank was moving its own predictions forward. “The tone suggests they are moving a bit more in our direction. And the statement reinforces that there are circumstances under which the Reserve Bank would raise before March."

ANZ chief economist Cameron Bagrie said there were not many surprises in the announcement but as the downside risks to the economy were mitigated, so too were pressures holding the OCR down. “As the risk profile for the general economy ticks up, interest rates will follow.”

Westpac chief economist Dominick Stephens said Wheeler had become more bullish on the economy and the concerns about the dollar had been downgraded slightly. “For the first time, the expected rise in inflation was explicitly linked to accelerating growth. This is very significant. For a long while the RBNZ had maintained the assumption that rising house prices and the construction boom would not prove inflationary. It seems that the RBNZ is beginning to abandon that view.”

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