Reserve Bank Governor Graeme Wheeler has just announced that the Official Cash Rate will be raised to 2.75% from 2.5% where it has been since March 2011.
This is the first rise in New Zealand's interest rates since July 2010 and looms as the first in a series of increases this year as the RBNZ looks to rein-in inflation.
Here is the statement from the RBNZ:
The Reserve Bank today increased the OCR by 25 basis points to 2.75 percent.
New Zealand’s economic expansion has considerable momentum, and growth is becoming more broad-based. GDP is estimated to have grown by 3.3 percent in the year to March. Growth is gradually increasing in New Zealand’s trading partners. However, improvements in major economies have required exceptional support from monetary policy. Global financial conditions continue to be very accommodating, with bond yields in most advanced countries low and equity markets performing strongly.
Prices for New Zealand’s export commodities remain very high, and especially for dairy. Domestically, the extended period of low interest rates and continued strong growth in construction sector activity have supported recovery. A rapid increase in net immigration over the past 18 months has also boosted housing and consumer demand. Confidence is very high among consumers and businesses, and hiring and investment intentions continue to increase.
Growth in demand has been absorbing spare capacity, and inflationary pressures are becoming apparent, especially in the non-tradables sector. In the tradables sector, weak import price inflation and the high exchange rate have held down inflation. The high exchange rate remains a headwind to the tradables sector. The Bank does not believe the current level of the exchange rate is sustainable in the long run.
There has been some moderation in the housing market. Restrictions on high loan-to-value ratio mortgage lending are starting to ease pressure, and rising interest rates will have a further moderating influence. However, the increase in net immigration flows will remain an offsetting influence.
While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years. In this environment it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand. The Bank is commencing this adjustment today. The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures.
By increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the Bank is seeking to ensure that the economic expansion can be sustained.
7 Comments
That extra money from lower interest rates just went towards debt repayments.
Can u point me to where u know this to be the truth...????
As far as I know both Private Sector and Public sector Debt has been growing..????
In my world, that growth in debt is a consequence of super low interest rates..... and super low interest rates, in a growing economy, mostly, capitalizes' into Asset values..
Yes I agree, too much focus upon the impact of rate rises on over-leverage bororwers here, and very little on fixed income investors who have sufferred greatly over the last 5yrs. What Wheeler has forecast (and it is only a forecast and will change if conditions change) is a little more than the market was expecting, but frankly, unless something does change, a 5.00 - 5.50% bank bill rate (7-8% mortgage rate) was always a strong possibility for any borrower looking to finance a house.
The borrowers who I really feel really pleased for now are the likes of a couple of younger family members who ignored the idiots, hooked into 5yr fixed rate mortgage at in the mid-5.00's a year or so ago when many were calling for rate cuts or at least no rate hikes for many years - i.e. they managed their risk and will sleep very well through this cycle, whatever it does. Unfortunately what some don't appreciate is that whilst we can debate all we like about what the RBNZ should or shouldn't do, the only thing that matters to our situation is what they actually do. Sitting there indignate, and screwed if highly leveraged, is just plain dumb.
Because politics are concerned with short term effects, i.e 1-2 years, esp leading up to election.
Rising house prices are always positive for economy in the SHORT term.
But add several of these terms together and you create a sick economy that needs a reset.
If house prices plunged 20-30% in a year as many would like, and which would actually be positive for the long term health of NZ economy, many jobs would be lost, developers would pull out, retail would tank, small businesses using home as security would fail, housing shortage would worsen, GDP would reduce. Exporters would benefit from lower nzd and interest rates, but the average NZ'er would have to go through some pain. People dont like pain.
Property investors should not be buying in auckland as its already too stretched. They should be looking at defensive investments, areas that have not had the increase in value that auckland has had and will be the next to see the value lift; high yielding growth centers that have exposure to dairy farming, taranaki and manawatu look good value, p.n is growing and has a worse housing shortage than auckland, central welly apartments that are not leaky or earthquake prone are good value (extreme shortage here with no new builds near cbd proper in pipeline) and will benefit when labour eventually get back into power (3.5 years time?) and start growing public sector again.
We live in a very fickle world, influenced more by what is going on outside our waters than inside.
Very few economies around the globe are functioning even with the massive supply of funny money that is still being pumped in to them.
Now we have the one economy that was the saviour "CHINA" stuttering with a looming debt bubble that no economy in history has been able to manage without a meltdown.
So the chances are China will meltdown in our current economic phase.
I don't think we will see many "rate rises" once that happens.
Zeebeck - you may well be right at some point, and if you could give me the timing it would be even better - the problem is, we don't know for sure it will be the case, but even if we can have some high degree of confidence in it, timing is THE question - if its stil 3,4,5yrs away alot can get damaged waiting for it, much like those that exited, or worse, shorted the stock market over the past 5yrs. Being right at the wrong time is just plain wrong.+
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