Floating mortgage rates unlikely to rise this year and may even fall

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The chances of floating mortgage rates rising this year remain remote and they might even fall if the New Zealand dollar remains so strong.

Thursday, April 26th 2012, 10:05AM 2 Comments

by Jenny Ruth

Reserve Bank governor Alan Bollard left his official cash rate (OCR) unchanged at its record low of 2.5%, as expected, expressed confidence inflation will remain benign and warned he will need to reassess "the outlook for monetary policy settings" if the currency remains strong without anything else changing.

Perversely, the New Zealand dollar jumped half a US cent to above 81.70 cents after Bollard's statements while wholesale interest rates fell two or three basis points.

Nick Tuffley, chief economist at ASB Bank, says the currency may have been capped ahead of the statement by expectations Bollard would have "some sharp words" about its strength.

"There wasn't any explicit threat to do anything about the currency," Tuffley says. There was also an absence of language such as the high currency being "detrimental," a word used frequently in the March monetary policy statement.

Nevertheless, "the Reserve Bank has the potential to keep rates on hold for longer or drop them," he says.

While most people don't expect the central bank will try to intervene directly in the currency market, Dominick Stephens, chief economist at Westpac, says that can't be ruled out, even though it would put Bollard at odds with Prime Minister John Key who has publicly stated such intervention wouldn't work.

"You can bet your bottom dollar they're thinking about it and the governor is seeking expert advice. I think he's deeply concerned about the exchange rate," Stephens says.

He won't rule out the chance Bollard will cut the OCR either, noting Bollard made no mention of the OCR rising: "I think the markets are correct to price in 20% to 30% probability of a cut," he says.

Peter Cavanaugh at Bancorp Treasury Services describes Bollards currency comments as "a verbal volley" which should be regarded as a strong message.

Bollard is increasingly worried about the high currency's impact on exporters and that it's undermining the re-balancing of the economy, Cavanaugh says.

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