Fixed rate fall tipped despite OCR hike

30th July 2010

Source: Stuff.co.nz

Fixed-term mortgage rates could be set to ease, economists predict, after a warning by Reserve Bank governor Alan Bollard that the economy is likely to grow more slowly than expected.

The Reserve Bank announced the second official cash rate hike in six weeks yesterday, raising it by 25 basis points to 3 per cent.

Interbank lending rates dropped as the bank added that further OCR increases would be more gradual than it signalled six weeks ago, as the outlook for economic growth softened.

"The pace and extent of further OCR increases is likely to be more moderate than was projected in the June statement," Dr Bollard said, adding that the OCR rate was still "very supportive of economic activity".

After slashing the OCR to a record low of 2.5 per cent early in 2009 to stimulate the economy out of recession, the Reserve Bank said in June that it would withdraw the stimulus gradually over the coming months.

Economists predict the OCR will be raised to 5 per cent to 6 per cent by early 2012. Most economists expect another 0.25 per cent rate increase in September, while the Bank of New Zealand is forecasting increases at each of the three remaining OCR reviews in 2010, before a pause in January.

The kiwi dollar dropped by more than half a cent against the United States dollar, and ended at US72.38c as the market digested the more downbeat tone.

Darren Gibbs at Deutsche Bank said the market reaction was prompted by the unusual level of detail about the challenges facing the economy for a mid-cycle OCR review, which highlighted falling commodity prices, lower net migration and weakness among our trading partners.

"It's not the fact that the market hasn't factored the fact that global growth looks weak ... it's more that the Reserve Bank was ready to acknowledge that so soon." Mr Gibbs said while floating interest rates would rise in response to yesterday's hike, fixed rates, which are more influenced by longer-term borrowing cost trends, could ease.

"What has happened today obviously puts a bit of pressure on the floating rates but it would tend to put a bit of downward pressure, if anything, on the term rates."

BNZ chief economist Tony Alexander said floating rates were still more attractive at present, but the gap was likely to narrow.

"For me it would still be a coin toss" between fixed and floating, leaning towards a two or three-year fixed rate. "We still see the interest rates going up although with a lower peak."

Mr Alexander said that the Reserve Bank's statement was more downbeat than the market had expected, but that no central bank could accurately predict how the world economy would emerge from the global financial crisis.

ANZ Bank senior markets economist Khoon Goh warned that while the Reserve Bank's statement reflected recent economic data, the bank's prediction of "respectable" short-term economic growth driven by strong forestry and manufacturing sectors could still be too optimistic.

"I think there is a risk that we might see a slowing in manufacturing and forestry exports as we expect global growth to ease off in the second half of the year."