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A rise in New Zealand mortgage rates over the past month may ease some of the pressure on the central bank to raise interest rates further to cool the robust residential property market, economists say.
The Reserve Bank of New Zealand raised rates to 7.5 per cent last month and said further increases may be needed because of inflation pressures caused by sustained rises in house prices, which are still growing at an annual pace of around 10 per cent.
The market is pricing in about a 40 per cent chance of a rise in the official cash rate (OCR) at the RBNZ's April 26 review, but some analysts said the latest rise in fixed-term mortgage rates may have given Governor Alan Bollard some breathing space.
"We now think it marginally more likely than not that Dr Bollard will opt to leave the OCR unchanged at the April meeting, pending a full reassessment of the inflation outlook in the June Monetary Policy Statement," Deutsche Bank chief economist Darren Gibbs said in a note to clients.
Two-year fixed mortgage rates have risen to around 8.9 per cent as of today, up about 60 basis points compared with around 8.3 per cent at the RBNZ's March monetary policy statement.
Analysts said the rise reflected a spike up in costs for retail banks from higher swap rates amid expectations of a further rise in the OCR.
The RBNZ has raised by a total of 2.5 percentage points since January 2004, but the tightening has had only a limited impact on the housing market because around 80 per cent of mortgages are at a fixed rate for a fixed term, insulating them from the immediate effects of a rise in the OCR.
In its frustration, the central bank has said it would explore alternative methods to cool the residential market.
RBNZ's Dr Bollard said last month the central bank would talk with retail banks, which have been competing aggressively on lending rates, to discuss capital adequacy ratios -- potentially requiring them to hold more cash in reserve.
But the rise in fixed-term mortgage rates since then may have taken some of the heat out of the central bank's concerns.
Nonetheless, most analysts still expect the Reserve Bank to maintain a tightening bias and say a further rise in rates cannot be ruled out.
"If they are really serious about having some impact on confidence and demand for housing, they can't wait another month," said Shamubeel Eaqub, director of investment research at Goldman Sachs JBWere
"They need to follow through and hit this thing while it's happening."
The latest Reuters poll showed six of 14 forecasters expect the RBNZ to raise interest rates to 7.75 per cent by the end of June.
- REUTERS
