Economists and markets say interest rates up this week

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Reserve Bank governor Alan Bollard will probably raise interest rates next week, despite recent data, particularly on the housing market, retail spending and inflation, being softer than expected.

Sunday, July 25th 2010, 11:13PM 4 Comments

by Jenny Ruth

For once, economists and the wholesale interest rate markets are in complete agreement that Bollard will raise his official cash rate (OCR) from 2.75% to 3% on Thursday.

The central bank may have revised its growth forecasts down slightly, given the recent decline in dairy prices and rapid slowing in net migration, says Jane Turner, an economist at ASB Bank.

Slowing net migration adds downside risks to the housing market, Turner says.

The Reserve Bank's forecasts for 2011 residential construction are stronger than other economists but the central bank is still likely to be comfortable with recent developments, she says.

“For a long time the Reserve Bank has been looking for a re-balancing in growth away from the household sector toward the export sector.”

Annette Beacher at TD Securities says Bollard's comments are likely to be relatively dovish and he will probably repeat his comments about the OCR peaking at a lower level than in previous cycles.

“This is to ensure that the bulk of New Zealanders remain on floating rate mortgages as the banking system is not ready to accommodate a rush into fixed mortgages and the Reserve Bank wishes to preserve this sensitivity of mortgages to changes in monetary policy for much longer,” Beacher says.

The latest figures show 34.8% of mortgages by value were on floating rates at the end of May compared with just 13% two years earlier. A further 35% of mortgages in May were fixed for less than a year compared with 32.1% two years earlier.

Brendan O'Donovan, chief economist at Westpac, says the last OCR hike in June hasn't been fully reflected in short-term mortgage rates and fixed-term rates for two or more years have actually fallen.

Darren Gibbs at Deutsche Bank says Bollard will probably raise the OCR again in September but may then pause “if it becomes evident that growth and inflation is indeed falling short of expectations.”

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