Bankers quickly follow Brash's lead

By ELLEN READ markets writer

WestpacTrust yesterday became the first of the big banks to increase its mortgage interest rates in the wake of the Reserve Bank's higher official cash rate announced on Wednesday.

WestpacTrust lifted its floating rate for home loans from 6.7 per cent to 7.2 per cent. The rise was double the Reserve Bank's 25 basis point increase in the official cash rate to 5 per cent.

The move was matched by the ASB Bank and the ANZ and others are expected to follow - including Jim Anderton's new Kiwibank, which is starting its national branch opening programme this week, offering floating mortgages at 6.1 per cent.

The ASB said that based on a table mortgage of $100,000 over a 20-year term, the 50 basis point rise would mean an increase of $30.05 in monthly payments.

WestpacTrust said the increase reflected the rise in the 90-day bank bill rate which was the main source of cash for home loans.

It said the 90-day rate had climbed by 0.7 percentage points since December in anticipation of the Reserve Bank's actions.

Reserve Bank Governor Don Brash said the increase was necessary insurance against inflationary pressure, as the booming housing market and increased migration was causing the economy to perform near its capacity.

WestpacTrust also raised its term investment rates by half a percentage point. The 90-day term rose to 5.15 per cent.

New Zealand was the second country in the industrialised world to raise rates, behind Sweden's Riksbank, which lifted its key rate to 4 per cent on Tuesday.

The United States Federal Reserve resisted the urge to tighten just hours before Brash's announcement, leaving its official rate unchanged at 1.75 per cent, a 40-year low.

The belief that Brash's action marked the start of a tightening cycle was reflected in yesterday's interest rate market.

The yield curve, which shows the relationship between bond rates and maturity lengths, flattened as bills and bonds tumbled.

The yield on the June 90-day bank bill futures contract rose to 6.02 per cent from 5.78 per cent previously, indicating that investors believed the central bank would increase rates another percentage point by mid-year.

The currency and equity markets escaped largely unscathed from the changes.

The stock market initially weakened as investors sold down stocks, mainly retail and construction, which were seen have gained from low interest rates.

But the reaction was short-lived and mild.

The New Zealand dollar was around a seven-month high of 44.30USc but this is seen as mainly due to a weakening United States dollar, which is losing ground amid suspicion that the US Administration is looking for a lower valued currency.

Locally the New Zealand dollar dropped 10 points to 43.25USc on the Reserve Bank's action but it found some buying interest at that level and soon recovered.

Brash said he did not believe the rise in the official cash rate would hurt the New Zealand dollar.

Some overseas commentators had suggested the New Zealand dollar might be punished if investors believed the country's central bank was prematurely tightening monetary policy and therefore choking growth prospects.