Further rate cut hopes fade

National Bank, which has long called for more and more aggressive rate cuts, now admits it’s unlikely it will get one in July.

Monday, June 11th 2001, 6:38PM

by Jenny Ruth

Don’t hold your breath for further cuts in floating mortgage rates.

Even the most diehard insisters that lower interest rates are warranted now expect the Reserve Bank will leave its official cash rate (OCR), which influences mortgage rates, unchanged at the next review date on 4 July.

That’s unless the so far robust domestic economic data takes a turn for the worse.

National Bank, which has long called for more and more aggressive rate cuts, now admits it’s unlikely it will get one in July.

"It now seems likely that the Reserve Bank will maintain they have sufficiently factored in slower international growth, particularly as the international slowdown is yet to show through in commodity prices," National Bank says.

It notes that the wholesale futures market isn’t anticipating further rate cuts and "is moving closer to actually pricing in an increase in the OCR in the December quarter," the bank says. Still, it can’t help commenting its lack of confidence that the market has got it right.

The major reason for its change in view is what it calls "teflon-coated consumers" in New Zealand as well as in Australia and the US.

The latest evidence that consumer behaviour isn’t being tempered by concerns about a slowing local or international economy were the April retail sales which rose 0.9% from March, more than double expectations.

ANZ Bank, which has taken a more mainstream view of where the OCR is heading and is also expecting no change on 4 July, notes the April retail sales rise was the third consecutive monthly increase.
It also notes that Australia’s central bank left its benchmark interest rate unchanged last week and that Australia’s economy expanded 1.1% in the March quarter following a 0.6% contraction in the December quarter.

"This development has engendered some renewed confidence in the Australian economy, which will be of particular encouragement to New Zealand exporters of manufactured goods," ANZ Bank says. Australia is New Zealand’s largest trading partner.

However, both banks acknowledge the risks that domestic rates will have to be cut to accommodate weaker international growth haven’t gone away yet. ANZ Bank notes the US economy remains fragile while National Bank says it was consumer spending which rescued the Australian economy in the March quarter.

"There was very little growth in other areas of private demand such as housing and construction investment. How this consumer resilience holds up in the face of a weakening labour market and falling incomes is an open question," National Bank says.

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