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Floating mortgage rates unlikely to rise this year as OCR remains on hold

Floating mortgage rates are unlikely to rise this year after Reserve Bank governor Alan Bollard took his cue from deteriorating sentiment about the global economy and kept interest rates on hold, as expected.

That's despite Bollard acknowledging the New Zealand economy is performing relatively well with domestic activity surprising on the upside.

However, the updated forecasts in his Monetary Policy Statement suggest Bollard now won't start raising his official cash rate (OCR) from its current record low at 2.5% until March next year.

He certainly made no mention of removing the "emergency" 50 basis point cut in the OCR made in March in response to the Christchurch earthquakes.

Philip Borkin, an economist at Goldman Sachs, says Bollard's decision was always going to be a balancing act and he opted to place more weight on the global turmoil than the domestic strength.

"The tightening bias is still there," Borkin says. "The Reserve Bank has acknowledged the domestic economy is improving and inflation risks remain."

While the global situation has had little impact on New Zealand so far, it's unlikely New Zealand will remain immune if it continues, he says.

Nick Tuffley at ASB Bank says key changes in the Reserve Bank forecasts are that it now expects the exchange rate to remain very high over a longer period and it expects the gap between the OCR and bank funding costs will remain high for an extended period.

"That's reinforcing the feeling that the OCR doesn't need to go as high to deliver the same lending rate," Tuffley says.

He's expecting the OCR will peak at 4% but acknowledges that lower than most other forecasters. While Tuffley is still forecasting the first OCR rise will be in December this year, "the risks are skewed to later - we're hanging off those global events."

Chris Green at First NZ Capital says it would have been difficult for Bollard to start raising rates when just about every other central bank around the world is looking to support economic growth.

He says the central bank had previously forecast the 90-day bank bill rate peaking at 4.9% but has brought that back to 4.3%.

Green interprets that as meaning the perceived "neutral" level of New Zealand interest rates is now lower. He has changed his forecast for the next OCR rise from December to March next year.


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