Reserve Bank Increases Official Cash Rate

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Reserve Bank Governor Dr Alan Bollard increased the official cash rate by 25 basis points to 2.75% and in doing so foreshadowed further small increases over the next coming months. 

This increase will affect property owners who currently have variable mortgages as the banks will respond with increases which are similar to the rise of the official cash rate.  It is expected however that most homeowners would have factored in this small percentage rise and the rises which are expected to continue during the next 12 months.  In his statement Dr Bollard made reference to the recovery that New Zealand was making in the economy and that although he was cautious in regards to the impact of the looming GST rise he believed that the confidence in the economy should convert to increased profits and stronger balance sheets for many companies.

Most business and service industries while seeing the increase as signalling confidence there was an air of caution in regards to the slowness of the economic growth and the recovery which is expected to be export led rather than consumer driven.  It is expected that the Reserve Bank will continue to steadily increase the cash rate until it hits close to 5% over the next 12 months.  There are two risks which are analysed when increasing the cash rate and that is the inflationary pressures and the return to indebted consumer spending. 

The New Zealand cash rate will be on a gradual path to higher overall interest rates rather than an aggressive path that has been taken by other economies.  The major trading partners of New Zealand throughout Asia and Australia also point to sustained recovery and with this the Reserve Bank trimmed its economic forecast slightly predicting a growth of 3.5% in 2011 which was down from the 4% forecast in March.

In summarising the impact of the interest rate rise on the property market Dr Bollard said that there should be a minimal effect as investors will continue to assess the recent budgetary statement along with the potential of higher returns from rental activity.  Those homeowners who are on variable rates should begin to consider the longer term effect of the rising cash rate and prepare to discuss the financial cost with their financial advisors.