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$100 note - Source: ONE News -
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The quake didn't shake Alan Bollard from his convictions but it may contribute to better news for mortgage holders.
Not surprisingly, a big focus of today's Monetary Policy Statement from the Reserve Bank was the impact of the Canterbury earthquake.
According to the Reserve Bank, the quake is likely to knock 0.3%
off economic growth in the current quarter, before actually
providing a stimulus to the economy over the next year of maybe
0.5-1% growth.
However, make no mistake. Dr Bollard did not hold the official cash
rate at 3% today because of the quake.
According to him, the Bank made its decision to leave rates on hold
the day before the quake.
That decision was made on the basis of a weak local and
international economy.
Over the course of the last few months we have seen rising
unemployment in New Zealand, a slowing manufacturing sector, weak
retail and flat housing.
All this has conspired to mean less consumer spending and less
pressure on inflation.
The world economy, in particular the US, has also shown signs of
slowing...although Bollard was quick to point out today he didn't
see a risk of a double dip recession there.
Of most importance to the markets though is the signal from Bollard
that the future path of interest rate hikes will be more moderate
than previously indicated.
The weak economy is of course one factor in the change of
heart.
However he also acknowledged that the real mortgage rates paid by
homeowners and businesses were quite high when relative to the
Official Cash Rate.
While the OCR is 3%, floating mortgage rates are around 6%.
He says Kiwis are being so cautious about their borrowing now that
they are not actually taking advantage of the low interest rates as
they might have in the past. This is particularly the case for
farmers.
So what does this mean for borrowers?
Well for those on floating rates it just reinforces the message
that there is little need at the moment to panic and rush to a
fixed rate.
Floating rates will stay on hold for another six weeks at
least...and possibly longer as any increase in the October and
December OCR reviews are by no means certain given the very
downbeat tone from the Reserve Bank today.
As to fixed rates they are usually dependent on a range of factors
including offshore funding costs.
However it is possible that we could see some more falls in fixed
rates.
RBNZ projections for 90 days bank bills in the statement today are
significantly lower over the next two years than they were in the
June statement.
(The 90 day bank bills are a rough, but not exact, rule of thumb
for where the OCR might be).
In June, the 90 Day bill was forecast to hit 6% in September 2012,
in today's statement it is forecast to hit 4.5% in September 2012.
That is a fairly big change.
All in all a pretty cautious and wary statement today, which is a
pretty sensible approach given the massive worries over the
earthquake, the collapse of South Canterbury Finance, and the
fragile nature of consumers at the moment.
Read more of Corin's blogs here
