Floating rates won't be rising anytime soon

Floating mortgage rates won't be rising any time soon with Reserve Bank governor Alan Bollard holding interest rates steady and emphasising the uncertain economic outlook means they will stay there for some time.

Thursday, April 28th 2011, 10:59AM

by Jenny Ruth

Bollard left his official cash rate (OCR) unchanged at 2.5%, its lowest level ever. His comments about the high New Zealand dollar being unwelcome saw the currency drop about 0.7 US cents while his comments that inflation will settle comfortably within his zero to 3% band saw wholesale interest rates ease about five basis points.

Bollard's statement "wasn't shy in being dovish," says Craig Ebert at Bank of New Zealand. "They were hardly going to come out and say, we were wrong" and the economy wasn't as bad as expected last month when Bollard cut the OCR from 3% in response to the Christchurch earthquakes.

Nevertheless, Ebert says inflation is unlikely to prove as benign as Bollard currently expects. "They're taking a very cautionary approach and there will be pressure in due course to remove some of this extreme accommodation," he says.

"In six months time there will be evidence that the earthquake hasn't cause a national recession, supply issues will be back on the table and inflation isn't going to fall away."

However, Darren Gibbs at Deutsche Bank says signs of the housing market beginning to revive, particularly in Auckland, and the rebound in business confidence, which some see as signs of inflationary pressures building, won't worry Bollard.

"The Reserve Bank is looking for a strong rebound in economic activity. It would be a worry if the data wasn't picking up," Gibbs says. The data would have to be considerably stronger than currently before the central bank started to worry, he says.

Jane Turner at ASB Bank says Bollard's decision to start raising the OCR again "will be heavily influenced by when the earthquake reconstruction picks up." At this stage, it's still too early to tell when that will happen.

Turner says the statement hasn't changed ASB's view that the OCR is likely to stay where it is until March next year.

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