End of an era - it's been quite a ride

The rate cutting is over.

That's the headline for borrowers and savers from this morning's decision by the Reserve Bank to leave the Official Cash Rate on hold at 2.5 per cent.

An amazing era for the New Zealand economy has reached a turning point. It began in June last year when the Official Cash Rate stood at a record high of 8.25 per cent. Floating mortgage rates were nearly 11 per cent and savers were getting more than 8 per cent for the money in their term deposits.

Then the credit crunch hit and the Reserve Bank embarked on the fastest and biggest series of cuts in the OCR in history, ending today with the OCR at 2.5 per cent.

That's where it will end for both the OCR and for mortgage rates, despite what many politicians and even the Reserve Bank would like to see.

Reserve Bank Governor Alan Bollard said in his statement with the rate-holding decision that he saw room for the banks to further reduce their short term lending rates.

Fat chance. If they banks did not cut after April 30's 50 basis point cut (and they didn't) then a decision to end rate cutting will not prompt them to cut further.

The question now is how long before the Reserve Bank starts increasing rates. Bollard was careful not to suggest this would be any time soon.

He repeated his assurance from the April 30 cut that the Reserve Bank would keep the OCR at or below the current 2.5 per cent level until late 2010. He even suggested the Reserve Bank could still cut again, albeit modestly.

This is now very unlikely to happen. Bollard has pointed to tentative signs of recovery from the global economy and has significantly revised his view of the New Zealand housing market and its impact on consumer spending.

Bollard now expects house prices to fall just 13 per cent from their December 2007 peak, which is well below the 19 per cent forecast he gave on March 12. He has warned that the March-May housing market recovery is not sustainable, but he admits this rebound could fire up consumer spending again.

The end result of all of this is that rates have stopped falling.

Borrowers need to prepare now for rising rates. I have my doubts that the Reserve Bank can sustain its assurance of low rates until late 2010 given the amount of monetary and fiscal stimulus inside our economy and the amount of money printing going on globally.

- Bernard Hickey

Read about today's OCR announcement here


Photo: Mark Mitchell