Borrowers likely to see home loan rates rise this week

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Reserve Bank governor Alan Bollard is likely to start hiking interest rates this week even though the housing market and consumer spending remain subdued and Europe's sovereign debt woes are pushing up banks' cost of borrowing.

Monday, June 7th 2010, 8:20PM 3 Comments

by Jenny Ruth

A www.goodreturns.co.nz survey of 12 economists found 10 of them are expecting Bollard to raise his official cash rate (OCR) from 2.5% to 2.75% when he issues his latest monetary policy statement on Thursday.

Annette Beacher at TD Securities says she is leaning marginally towards Bollard holding the OCR unchanged for another six weeks because the only "smoking guns" in recent data were the drop in the unemployment rate from 7.1% to 6% and the strong "own activity" indicator in National Bank's latest monthly business survey which continues to strengthen.

Holding the OCR steady would push the New Zealand dollar down, a desirable outcome, Beacher says, while raising it and making a hawkish statement would push the currency sharply higher, damaging the weak recovery underway.

She says mortgages are now 69% interest-rate sensitive with 33% on floating rates and 36% on fixed-rate mortgages with less than a year to run so it doesn't matter much if Bollard waits another six weeks to raise the OCR.

However, Westpac chief economist Brendan O'Donovan says Bollard can no longer describe the inflation outlook as "comfortable" with Treasury forecasting annual inflation will peak at "a whopping 5.9%" by early next year as a result of government policy changes including raising GST from 12.5% to 15% from October.

Bollard and the central bank "can look through short-term inflation spikes but it needs to be careful that they don't influence longer-term expectations," O'Donovan says.

O'Donovan estimates Europe's woes have pushed the long-term borrowing costs of Australasian banks up about 30 basis points since March but says Bollard is likely to treat only a portion of that as persistent.

Darren Gibbs at Deutsche Bank also expects a rate hike. Despite the sharp fall in global markets because of Europe's woes, "most other developments suggest that the outlook for domestic growth is in fact somewhat stronger than had been assumed previously."

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