OCR up, mortgages to rise $10 a week

The Official Cash Rate has been lifted to 2.75pc

The Reserve Bank has lifted the Official Cash Rate by 25 basis points to 2.75 per cent.

Floating mortgage rates are expected to be lifted by banks soon.

The rise is tipped to lift the cost of a $200,000 floating mortgage rate by about $10 per week.

About one-third of mortgage holders in New Zealand have their mortgages on floating interest rates.

Council of Trade Unions economist Bill Rosenberg said the 90-day interest rates are predicted to increase from the current 2.9 percent to 4.2 percent in March 2011 and 5.6 percent in March 2012, further increasing the cost of mortgages.

This is the first increase in official rates since July 2007, when the were raised to 8.25 per cent. Since April 2009 they have been at a record low 2.5 per cent.

Economists are predicting more hikes are to come.

Bollard said the New Zealand economy had entered its second year of recovery with growth becoming more broad-based.

Economic growth of around 3.5 per cent was expected this year and next, with the main drivers higher export prices and volume growth, an improving labour market and a pick-up in residential and business investment.

ASB economist Jane Turner said she expects the Reserve Bank will lift the OCR by 25 basis points at every meeting until it reaches 5 per cent.

"As is the case with all RBNZ decisions, each and every one is always conditional on events leading up to it. Europe remains the main event risk that could make the RBNZ pause at some point in the near term."

ANZ economist senior markets economist Khoon Goh said the general tone of Bolalrd's statement was more upbeat than that expressed bv the Bank of Canada in their policy assessment earlier this month.

"The outlook for growth is noted as becoming more robust and broad based despite consumer spending expected to remain somewhat contained."

"Recent global market turmoil is acknowledged, but has been treated as a risk at this stage. The RBNZ's judgement is that the main impact on New Zealand will be via continued upward pressure on bank funding costs - which reinforces a lower end point for the OCR."

Bollard said he expected households to remain relatively cautious, with the housing market and credit growth staying subdued.

"This moderate household spending contributes to some rebalancing in the economy," said Bollard.

"Given this outlook and as previously signalled, we have decided to begin removing some of the monetary policy stimulus that is currently in place. The further removal of stimulus will be reviewed in light of economic and financial market developments.

"The fact that bank funding costs are higher, long-term interest rates are higher than short-term interest rates, and a greater proportion of borrowers use floating rate mortgages should all reduce the extent to which the OCR will need to be increased relative to previous cycle," he said.

This morning's move was widely anticipated, with a Reuters poll earlier this week showing 15 of the 18 firms surveyed predicting a 25 basis point increase, one forecasting a 50 point hike and two saying Bollard would wait until next month to move.

Today's decision promises to have more bite than when Bollard last raised the OCR. The average mortgage duration was sitting at around 12 months in March this year, while it peaked at almost two years in 2007.

There were $111.2 billion of residential mortgage loans on fixed interest rates in March, compared to about 127.9 billion two years ago.

See the text of Governor Alan Bollard's statement here.
See the full Monetary Policy Statement here.