Higher for longer

While everyone expected the Reserve Bank to leave its official cash rate at 7.25%, as it did last week, there was surprise expressed at the bank’s comments regarding future easings. RBNZ governor Alan Bollard made it clear that rate cuts won’t be starting this year, and he pushed the target out to well into 2007. Previously he had hinted at cuts in the first quarter of 2007, now he is suggesting sometime in the second half of the year. Following his comments bank economists took note and pushed their forecasts out too.

They wiped out the chance of a rate cut in either January or March, which were previously deemed a 50% and 100% chance respectively.

Bollard made it clear he wanted rates to stay up as there was a raft of mortgages coming up for refixing later this year and he wanted borrowers to pay higher rates. Such an outcome means that there will be less money to fuel inflation in the economy.

“The recent rise in rates leaves the bank confident that the average interest rate paid on outstanding mortgage debt – the ‘effective’ mortgage rate – will continue to rise through the remainder of 2006,” the Reserve Bank says in its monetary policy statement. While the central bank’s views have the most impact on the short term fixed rates and variable rates, the news for longer-term rates which are set by international markets isn’t good.