Rate hike will dent housing market

With the Reserve Bank (RB) poised to raise rates to 7.50% tomorrow, economists are saying this will dent housing market activity.
Macquarie Bank economists say a 25 basis points hike in rates is likely to dent domestic demand and housing market activity, “although given the lags in effectiveness of monetary policy, the effect of a rate hike in the near-term will be muted”.
Macquarie Bank believes that rates will have peaked at 7.50% and says a key question is whether tightening policy at this juncture will achieve anything.
Whether tighter monetary policy cools the housing market depends on “whether an increase in official cash rates will flow through to the three to five-year part of the curve, which is where most mortgages are priced,” says Macquarie.
It says it’s possible that if the RB makes monetary policy more restrictive, the market will start to price in more aggressive easing in a few years’ time. “This could ensure that bond yields further out the curve either remain unchanged or even rally.”
“This would mean that the housing market would continue to simmer, but firms reliant on variable rate loans would suffer.”

The next OCR review will be on 26 April 2007.