Currently market expectations have priced in future rises, but not at the speed earlier suggested by the Reserve Bank.
In terms of what it is thinking the RBNZ says: “The speed and extent to which the OCR will need to rise will depend on future economic and financial data, and its implications for inflationary pressures.”
The Reserve Bank’s 90-day interest rate forecasts show it sitting at 3.3% this month, 4.5% in June 2015 and at 5.0% 12 months later.
Following today’s OCR increases borrowers can expect to see floating rates rise 25 basis points immediately.
The central bank makes it clear rates will keep rising.
“Growth has become more self-sustaining and very low interest rates are no longer appropriate given the rise in inflationary pressures. Consequently, the bank expects to raise the OCR towards a more neutral level.”
It says there are five key factors that will determine how interest rates rise. These are: export prices, the exchange rate, net immigration, the housing market and construction.
In its discussion on these factors in the bank’s Monetary Policy Statement it highlights that these drivers can be volatile.
With regards to the housing market the bank says that annual house price inflation fell to 9% in the December quarter following the introduction of its lending restrictions.
“House price inflation is expected to continue moderating over the next three years as a result of projected interest rate increases, easing immigration and high household debt.”
Expected housing construction the hotspots of Auckland and Christchurch are also expected to slow house price inflation.
However, a source of uncertainty is how households will respond to rising interest rates following an extended period of very low rates.
It does say that borrowers who move from floating to fixed rates may insulate themselves from rising interest rates.
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