Home owners look set to pay more in interest

12.30pm

Home owners look set to pay more for their mortgages after a rise of 0.25 percentage points in the Official Cash Rate (OCR) this morning.

The Reserve Bank increased the OCR from 5.25 to 5.5 per cent in a move to rein in domestic inflation.

Most major banks have previously had floating interest rates of 7.5 per cent but if they raise these to 7.75 per cent in response it would cost borrowers about $19 a fortnight more on a 30-year mortgage of $240,500 -- the median New Zealand house price in March.

The Reserve Bank also signalled a further upward movement may follow later this year, with Governor Alan Bollard saying New Zealand's economy continued to perform strongly and the global economy was also improving.

"However, domestic inflation pressures remain strong and annual CPI (Consumers' Price Index) inflation looks set to rise over the year ahead, as we projected in our March Monetary Policy Statement," Dr Bollard said in a statement.

"Moving interest rates to less stimulatory levels appears prudent to ensure inflation remains within the target range over the medium term."

Today's move further extends the interest rate differential between New Zealand and the rest of the developed world, often cited as a contributing factor to the local currency's rapid appreciation over the last 18 months.

Although the kiwi has eased from its highs of about US71c in recent weeks to just over US62c before the announcement this morning, Dr Bollard said: "At this stage it remains unclear whether the fall in the exchange rate over recent weeks will be sustained and thus what its impact on activity and inflation pressures will be."

In January Dr Bollard surprised economists by increasing the OCR from 5 to 5.25 per cent in a move widely thought to be an attempt to remove some heat from the booming housing market.

Recent data suggests that the housing market activity remains robust and Dr Bollard indicated this may have influenced the bank's decision today.

"Within parts of the domestic sector, such as housing and construction, some data suggest a cooling of activity, but the evidence is mixed and pricing pressures remain strong. Given these uncertainties, a further adjustment to monetary policy cannot be ruled out."

Dr Bollard said a number of factors were likely to have a dampening effect on inflation pressures over the next year or so, reducing the need for policy action.

"Two such factors would include a further fall in net migration and the delayed effects of the recent high exchange rate on activity in the export sector."

In contrast to the Reserve Bank's January rate hike, today's decision should come as little surprise to markets. Seven of 15 economists recently polled by Reuters had expected the move.

The kiwi instantly responded to the announcement rising from US62.14c immediately before to US62.40c straight after. By 9.30am it had settled to US62.30c.

On the debt market, 90-day bank bill yields rose 10 basis points to 5.77 per cent by 9.30am and bond yields also rose.

- NZPA and HERALD STAFF