Bollard likely to raise interest rates sooner

As expected, Bollard kept his official cash rate (OCR) at its 2.5% record low, but rather than saying it will stay there "for some time,"

Wholesale markets reacted strongly, the currently rising nearly a US cent and the two-year swap rate, from which two-year fixed rate mortgages are priced, rising 10 basis points.

Westpac chief economist Dominick Stephens says Bollard's statement was "particularly hawkish. The Reserve Bank is certainly signaling an OCR rise this year and a steeper series of hikes next year than previously."

While Bollard is still assuming households will continue to focus on repaying debt which will constrain consumption and house prices and higher inflation expectations will prove temporary, "the risk is both (consumption and inflation) will be stronger."

Stephens is now expecting the first OCR rise will come in December this year compared with his previous January expectation.

Craig Ebert at Bank of New Zealand, who had thought Bollard's previous outlook had been too dovish, says "we thought it was a very sensible, reasonable statement. It's moved in the right direction and it's acknowledging the recovery's still in place and it will start to create some inflation pressures down the track."

Nick Tuffley, chief economist at ASB Bank, says he's now expecting the first OCR rise will come in January next year compared with his previous March pick, largely because he suspects the Christchurch reconstruction effort will take a little longer to get underway than Bollard currently expects. "We're not convinced it will be that swift."

Tuffley says while Bollard is still talking about households being constrained by repaying debt, the Reserve Bank's consumption forecasts have increased from looking unrealistically low to something more likely.

Comments from our readers

On 9 June 2011 at 12:39 pm darcy ungaro said:

As evidenced by the spike in NZD and the 2 yr swap rate, the market in NZ is more a product of 'jaw-boning' than actions. I suspect less talk and more action from the RBNZ would make any adjustments of the OCR more potent/effective (ie, stop talking about when you’ll do it, just do it when it’s time). What the NZ economy would benefit the most of right now is continued stability. Businesses/households need to feel free for a while longer, before more optimistic decision begin to get made - with this constant reminder that the rate will one day rise, how does this help confidence??

On 9 June 2011 at 4:38 pm Ravioli Urgento said:

I agree, the confidence is very much a local issue. Auckland has always been an economy of its own. Christchurch will eventually rebuild but before that happens we have mother nature first and then many political and powerful business interest later who will have to be overcome. The real problem is that the bank margin is too high, which we have seen in the quarterly bank profits [yes they are lower but still substantial when one looks at the remaining NZ economy]. and the OCR is dependent on a volatile world economy. NZ is only reactive an because of the huge deficit there is not much space left for Bollard actually to move. Consumer confidence will not come back until job safety comes back and for that the economy has a long way to go before it will improve. The economy would receive a real stimulus when the actual banks and lender would reduce their profit margins and therefore really allow the economy to grow. So far this has never happened. Its ironic to blame consumer confidence when now they are reducing dept and the banks are complaining their quarterly profits are lower. One can only hope that the consumers stay away from consuming for longer and are further reducing their dept. The reality is that the economy will not run without consumers - but hey, how about rewarding the consumer with a lover bank interest rather than always keeping them on a leash.

On 10 June 2011 at 9:12 am Zef said:

Picture this!, the $ value of all floating home loans by the end of August will be $100bn at current levels of change. By the end of the year 65% of all home loans could be on a floating rate. Now, every 25 basis point increase in the OCR will add $250m+ p.a. of increased interest payments by floating home loan holders. Fixed interest rates will also drift upwards in tandem no doubt. SO! over a few OCR rises to say 100 basis points more than today, the interst rate bill will increase by over $1bn p.a.; can the economy really afford that?

Bollard likely to raise interest rates sooner

Reserve Bank governor Alan Bollard is likely to raise interest rates sooner than previously signaled, having become more comfortable the economy is recovering and becoming more concerned about the inflation outlook.

Thursday, June 9th 2011, 9:49AM 4 Comments

Comments from our readers

Commenting is closed

www.GoodReturns.co.nz