Interest rates

It was no great surprise that the Reserve Bank increased the Official Cash Rate (ORC) by a further 0.25% last week. This is the third consecutive increase since March, and pretty much in line with predictions the Reserve Bank itself made earlier this year.

The ANZ responded immediately by increasing its floating and flexible mortgage rates by the same amount. The other banks are expected to follow suit.

The ANZ’s carded rates are now as 6.49% floating rate, 5.75% six month fixed rate, 5.95% 1 year fixed, 6.49% 2 year fixed, and 6.55%, 7.19% and 7.4% for the 3, 4 and 5 year rates (see chart).

Most economists are predicting two, maybe three, further increases of 0.25% each, between now and the end of the year, so expect floating mortgages rates to be 7% by 31 December. The OCR reviews are every six weeks -the remaining four this year being on 24 July, 11 September, 30 October, and 11 December.

The governor’s commentary associated around the release had some interesting things to say about the economy. The main points were:

  • Economic growth is expected to be 4% for the year to the end of June.
  • The economies of our trading partners are improving gradually.
  • While our export commodity prices remain historically high, recent falls will reduce farm incomes over the coming year. The Reserve Bank is projecting a 27% fall in dairy prices over 2014 and the international price of forestry products to fall in the second half of 2014 due to a weakening in China’s construction sector.
  • Business and consumer confidence remains high, so job prospects remain positive.
  • On exchange rate the Reserve Bank says, ‘the exchange rate has not yet adjusted to weakening commodity prices, but is expected to do so. The Bank does not believe the exchange rate is sustainable at current levels.’ This seems more like an attempt to talk the exchange rate down rather than an expectation that it will fall. Rising interest rates are likely to attract overseas capital and therefore place demand presume on the exchange rate, offsetting the reduced overseas earnings.
  • On migration, they are forecasting annual net inflows to peak in mid-2014 at 37,000 and then ease steadily for three years.
  • About housing they say, ‘While net immigration is adding to housing demand, momentum in the housing market has eased since the middle of 2013. Annual house price inflation fell to 9 percent in the December quarter, following the introduction of restrictions on high loan-to-value ratio (LVR) mortgage lending and the beginning of mortgage rate increases.  House price inflation is expected to continue moderating over the next three years as a result of projected interest rate increases, easing immigration and high household debt. Increased construction to address housing shortages in Auckland and Canterbury is also expected to slow house price inflation.’ In other words, house prices are not expected to rise as fast on the next few years, at least as things stand today.

The big unknown between now and the end of the year is of course the general election, and that will depend on the deals the politicians make between now and 20 September, and after.

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