RBNZ finally gets a response

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Friday 18 June 2010

If ASB had not kicked off mortgage rate increases yesterday, then the Reserve Bank would have started thinking in terms of boosting the Official Cash Rate (OCR) 0.5% in July simply to force the response it wants, says BNZ economist Tony Alexander.

By Jenha White

In the BNZ Weekly Overview he points out that the Reserve Bank last week raised the cash rate from 2.5% to 2.75% with the explicit intention that banks raise lending rates - otherwise nothing has changed apart from reduced bank margins.

The Reserve Bank almost certainly won't have to do that now that increases have started and BNZ expects a 0.25% move in five weeks time.

As for what borrowers should do - the raw numbers say fix one to three years. But Alexander says it is a big ask to jump into a three or even two year rate from current still low floating rates.

There is also a risk that the Reserve Bank does not raise rates as rapidly as BNZ has pencilled in given risks in Europe and the chance the current unwillingness of households to borrow remains for another year or two.

"So it is really still the toss of a coin with awareness needed that there is absolutely no canny thing a person can do to avoid higher financing costs over the next three years," says Alexander.

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