By Alex Tarrant
The Reserve Bank of New Zealand will have significant traction when it decides to tighten monetary policy, with most mortgage borrowers in New Zealand now on floating or close to floating interest rates, RBNZ Governor Alan Bollard says.
The central bank’s decision to cut the Official Cash Rate 50 basis points to 2.5% today has led to corresponding drops in retail banks’ floating mortgage rates, which are likely to stay at these low levels for much of this year.
However, when the Christchurch rebuilding process kicks in in 2012, the Reserve Bank is likely to have to increase the OCR in efforts to stop inflation rising as economic growth picks up considerably.
Monetary policy has a much more significant effect on floating and short term interest rates, with almost 50% of New Zealand mortgages floating before the RBNZ made its decision to cut today.
Speaking to media this morning in the Reserve Bank, Bollard said there would be a challenge with inflation over the next couple of years as the Christchurch rebuilding takes place.
“It’s a massive rebuilding. It’s roughly four times Christchurch’s normal building program,” Bollard said.
“We believe the earthquake’s effect on our current numbers does something like adds 2.5% growth next year – it’s very significant by New Zealand standards. So I think we’ve all got a challenge here, and the challenge is, first of all, a depressed and disrupted year this year, but then some years of quite strong growth,” he said.
“So there is a risk [of inflation], and that’s why we’re just going to have to be very alert to the economic numbers that come through."
The Reserve Bank had, on the other hand, observed pretty moderate inflation coming through from the GST increase on October 1 last year.
“That’s all happened in a pretty orderly sort of way, inflation expectations have looked pretty anchored. That’s given us some confidence that we can actually cut today, but we will have to remove some of that accommodation at some stage,” Bollard said.
“I think the fact that now most New Zealanders are on floating, or pretty close to floating mortgage rates when they’re borrowing, does mean that there is quite a lot more flexibility on monetary policy,” he said.
“When the time comes to tighten, we’ve got some confidence that monetary policy will have significant traction as a result of that.”
Meanwhile Bollard would not be draw on whether he was worried other central banks around the world would be too slow in removing stimulus as inflation pressures grow.
“Well Bernard, you know the old Libyan proverb that a man doesn’t laugh at another man’s camel.”
1 Comments
"traction"...hahahaha....please explain where rates will go once the election is done and dusted.
Are the sheeple really that bloody dumb.
Hello stagflation on a grand scale because that's what we have coming in the xmas sock.
Bollard released from the chains to chase the curve..floating rate rushing above 5% and what will that do for households deeply in debt.
Chch rebuild creeping slowly forward with materials and labour and contract charges exploding higher..plus gst on top!
So what will the building sector elsewhere in NZ look like....picture a Possum run over by a 50 ton truck and trailer unit!
You have to remember..this economy is a property ponzi scheme with some commodity exporting on the side and a bit of tourism...go figure what the real post 2011 era will be like.
The top hotels in Auckland are already planning to have the rooms ready for the IMF army.
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