Unease is growing that further rises in interest rates could derail the New Zealand economy. The Reserve Bank has raised the Official Cash Rate to 3.25 percent and signalled more increases this year.
Prime Minister John Key says the Reserve Bank's move reflects a stronger economy, but Opposition parties say rising interest rates are due to the failure of the Government to address housing supply issues. Business groups and unions say more hikes are not what the economy needs.
Reserve Bank Governor Graeme Wheeler Photo: RNZ / Diego Opatowski
Reserve Bank governor Graeme Wheeler on Thursday reiterated that economic activity has accelerated, and further rises in the benchmark interest rate will be needed to keep inflation in check.
That prompted New Zealand's largest bank, ANZ, to lift its floating mortgage rates. From Monday, it would increase these by a quarter of a percentage point to 6.49 percent, and lift its savings rate by the same amount from the beginning of July.
Westpac's chief economist Dominick Stephens said borrowers should also prepare for higher fixed-home loan rates, which have fallen recently.
"Graeme Wheeler has had no shyness whatsoever to indicate that he fully intends to normalise monetary policy over the next couple of years. What that's doing is delivering higher fixed-term mortgage rates."
Some lobby groups are worried that aggressive interest rate rises could throttle economic activity. Business New Zealand said exporters' returns are being put in jeopardy and a pause in rate rises may now be in order.
The New Zealand dollar rose sharply after the Reserve Bank announcement, increasing by more than 1 cent to over US86 cents.
But an economist at Business New Zealand, John Pask, said that's not what the economy needs. "If we crank interest rates too high, it might actually impact adversely on the dollar - and no one really wants to see that."
Mr Pask said the Government could do more to help, including relaxing local government zoning requirements to help boost the number of houses built.
The Council of Trade Unions said growth is patchy and, while workers' mortgage bills are rising, wages are not.
More increases tipped
The Reserve Bank's forecasts show another two interest rates rises this year, which would take the benchmark rate to 3.75 percent.
Releasing the decision on Thursday, governor Graeme Wheeler said inflationary pressures were expected to increase.
"How much the Official Cash Rate will need to rise will depend on future economic and financial data and how these affect inflationary pressures."
Mr Wheeler said by increasing the OCR as needed to keep future average inflation near the 2 percent target mid-point, the bank was seeking to ensure the economic expansion could be sustained.
Economy growing
The Reserve Bank reiterated that the economy had considerable momentum, fed by accelerating activity in the construction sector, a sharp rise in net migration, historically high commodity prices and buoyant confidence. It forecast growth of about 4 percent in the year to June.
House price inflation remained high, but the housing market had moderated since late in 2013 when restrictions were applied to high loan-to-value ratio mortgage lending and when mortgage interest rates began rising.
While inflation remains moderate, the Reserve Bank expects inflation pressures to build as the economy runs out of spare productive capacity, particularly in the construction sector. The dollar remains high, despite weaker dairy prices, but the central bank does expect it to fall.
Analysts divided on further rises
Economists predicted the Reserve Bank would lift the Official Cash Rate on Thursday, but are divided about how high the central bank will need to raise rates in the future to keep prices in check.
Some expect the bank to take a stern line, and reinforce its message that the economy remains robust and regular rate increases will be required, perhaps as early as next month. But others expect a pause until the end of the year, to recognise that the dollar remains high and parts of the economy have slowed.
The central bank had raised the benchmark interest rate on 13 March from a record-low 2.5 percent to 2.75 percent, and followed this with another increase to 3 percent on 24 April.
