OCR unchanged; rate increases subdued

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The Reserve Bank has kept its official cash rate at 2.50% and says little has changed since its previous Monetary Policy Statement in June.

Thursday, September 13th 2012, 9:01AM

“New Zealand’s trading partner outlook remains weak,” Reserve Bank governor Alan Bollard said. “Several euro-area economies are in recession and Chinese growth has slowed. The risk of significant deterioration in the euro area persists.”

Bollard says that in the New Zealand economy is expected to grow “modestly” in the next few years.

On the positive side: “Housing market activity continues to increase as forecast and repairs and reconstruction in Canterbury are expected to further boost the construction sector.”

However offsetting the positives are “constrained demand growth, and the high New Zealand dollar continues to undermine export earnings and encourage substitution toward imported goods and services.”

For borrowers the likelihood of increases in home loan rates looks low. The central bank’s 90-day interest rate project has been brought down slightly and remains low over the forecast horizon period that goes out to the end of 2013.

Earlier the markets had been pricing in a possible cut to the OCR on the back of nervousness around global factors including the Greek election.

It says there was a slight easing bias priced into the overnight indexed swaps curve reflecting a small probability of the Reserve Bank cutting the OCR within the next six months. From about March 2013 onwards, a modest chance of the

Reserve Bank tightening policy is priced in. The profile of expected rate moves is similar to June, but the amplitude of the moves is much smaller.”

It says across the wholesale swap curve, New Zealand rates are slightly higher, but banks are competitive in the home loan market particularly targeting good credit-quality borrowers.

Floating home loan rates remain the most popular term, accounting for 59% of all outstanding mortgages.

However, its share has fallen four percentage points since April owing to reduced short-term fixed rates.

The weighted average mortgage rate continues to fall to historical lows and is currently 5.84%.

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