Floating mortgages on hold

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Mortgage holders can be reasonably confident floating rates are unlikely to rise for some months after Reserve Bank governor Alan Bollard left interest rates unchanged.

Thursday, September 16th 2010, 12:38PM 1 Comment

by Jenny Ruth

Bollard cited the weak household sector with soft consumer spending, house sales falling and flat house prices, the weaker than expected global recovery and the disruption caused by Canterbury's earthquake.

As expected, Bollard left his official cash rate (OCR), which directly affects floating mortgage rates, unchanged at 3%. While he indicated further OCR hikes are likely at some point - he has raised it twice since June from 2.5% - he left the timing open.

Bollard also said the pace and extent of further OCR rises are likely to be more moderate than he was expecting in June.

Nick Tuffley, chief economist at ASB Bank, says the central bank has revised its OCR forecasts down significantly and now expects it to peak at about 4.7% in 2013 compared with 6.1% three months ago.

Tuffley says he had been among the more dovish in the market "but it was still on the dovish side of our expectations.

"It's quite a massive change in the space of three months. They've probably done some pretty hard thinking about just how resilient are households," he says.

In particular, there's been no big increase in spending and demand for credit remains very low.

Robin Clements at UBS New Zealand says the OCR will need to rise again but the timing is uncertain and will depend on the data.

"I read it as the economy can't withstand action now, there's too much uncertainty so we will do nothing right now," Clements says.

"I think you can say with a reasonable degree of confidence there will be nothing in October," he says. While Clements still has an OCR hike pencilled in for December, Darren Gibbs at Deutsche Bank says today's statement is very dovish.

"Clearly, there will be no increase in the OCR this year. We will come back after Christmas and see if we get one in the new year," Gibbs says.

Bollard was "very downbeat" on domestic demand and prepared to look through any inflationary impact from the earthquake. "Rates will need to go up over time, but there's clearly no urgency," he says.

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