There's nothing like an interest rate increase and the promise of many more to focus the mind. The Reserve Bank this week raised its official cash rate by 25 percentage points to 2.75 per cent, and forecast it was likely to rise to as high as 5 per cent within three years. Many people will scramble to fix their mortgages for two or three years at somewhere close to 6 per cent. But don't be surprised if a flood of fixing pushes up rates so high that it may even make sense to stay floating.
Either way, the prospect of rising interest rates has already had an effect. The Reserve Bank said its limit on high loan-to-value ratio mortgages had moderated house price inflation to the point where prices fell in seasonally adjusted terms in January. But the rise in fixed mortgage rates late last year was also a major factor. More rate rises will dampen the animal spirits in the housing market.
The prospect of rate rises has also dampened the export sector. News of the Reserve Bank's more aggressive rate-rise track pumped the dollar up to near a one-year high of US86c late on Thursday. Those exporters not able to benefit from record high dairy prices are feeling the pain.
So it's doubly important for anyone near the levers of power to do everything they can to help the Reserve Bank avoid steep and fast rate increases. That means monetary policy needs mates.
AdvertisementAdvertise with NZME.
The Green and Labour parties are rightly pressuring the Government over power price increases that are still outstripping inflation.
Central and local government fees and charges have been rising at an annual rate of 3.5 to 4 per cent for the past 18 months. Any new government or council should be bearing down on those fees and charges to help the Reserve Bank, and therefore help save households, businesses and exporters from the pain of big and fast rate increases.
And they should be doing everything to help boost supply of houses, skilled labour and competition to bear down on inflation.
That also means strengthening the power of regulators to restrain or force down monopoly pricing. The more mates the Reserve Bank has, the better.