OCR rise likely to raise mortgage rates

Jenny Ruth

Thursday 29th January 2004

Against expectations, Reserve Bank governor Alan Bollard raised his official cash rate (OCR) from 5% to 5.25%, citing stronger than expected household spending and activity in the construction and housing market.

"By raising interest rates now, we hope to avoid having to increase interest rates more aggressively later on," Bollard said on announcing the increase.

Bank of New Zealand economists had seen today's decision as a close call. Senior markets economist Craig Ebert says the central bank's focus is very much on the economy.

"It's so strong and operating pretty much above its long-term sustainable level," Ebert says, noting that unemployment is very low and tracking lower and that the housing market is "going ballistic."

"The potential for inflation to rise is building."

The decision saw an immediate sharp rise in wholesale interest rates, 90-day bank bills jumping about 20 basis points to 5.54%.

Ironically, while the strong New Zealand dollar was the big reason economists had thought Bollard would wait a bit more, today's decision pushed the currency higher, although the reaction wasn't too extreme. The currency rose from 67.40 US cents to 67.75 cents immediately after the announcement.

Anthony Byett, chief economist at ASB Bank, who had been sure there would be no move today, says it's simply a question of timing. "I having changed my view. He's started a bit earlier than I or others thought he would."

Bollard's decisions at the next two OCR reviews in March and April are likely to be just as finely balanced, Byet says.

New Zealand's wholesale interest rate markets received a double whammy when just before Bollard's announcement, the US Federal Reserve decided to leave its official interest rate unchanged, but changed its rhetoric in what was widely interpreted as softening the market up for rate increases in the near future.

"There will be quite a significant increase in wholesale rates today. I suspect that will feed through to retail rates, if not today, then in the next few days," Byett says

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