Floating rates to rise but not as fast or far as expected

While floating rate mortgages will rise again thanks to Reserve Bank governor Alan Bollard, the good news is they probably won't rise as much or as fast as previously expected.

Thursday, July 29th 2010, 10:00AM

by Jenny Ruth

In line with the expectations of all economists who follow the New Zealand economy, Bollard raised his official cash rate (OCR), which directly influences floating mortgage rates, from 2.75% to 3%, but his accompanying statement was considerably more dovish than some had expected.

Market reaction was swift with the New Zealand dollar falling more than half a US cent and two-year interest rate swaps falling about 8 basis points.

The key part of Bollard's statement was: "The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement."

Nick Tuffley, chief economist at ASB, says the central bank's June monetary policy statement had been forecasting economic growth would average about 1% a quarter for the rest of the year and it's obvious now that's unlikely.

While the Reserve Bank had been predicting the OCR would peak about 5.75% or 6%, Tuffley is expecting it will be more like 5%.

Westpac chief economist Brendan O'Donovan says Bollard made it clear that even with today's OCR rise, it is still providing an "extraordinary" level of support for economic activity.

O'Donovan says it was surprising Bollard was so explicit, given the market was already pricing in a much lower OCR.

"Today's statement suggests we should be pricing in even less than what we've got priced in," he says.

"They've given that the green light plus some."

Chris Green at First NZ Capital says global growth is likely to be slower than the Reserve Bank had been forecasting but an even bigger factor in its decision making is likely to be the extent to which households are paying down debt.

And the fact consumers are carrying so much debt makes them very sensitive to changes in interest rates.

"I think the major handbrake is going to be softer consumption in housing," Green says.

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