OCR likely to stay at 1.75% until September

OCR likely to stay at 1.75% until September. Inflation is closer to the target band and if it doesn’t exceed 3%, there is no need for the RBNZ to take action.

The RBNZ warned that household borrowing has increased substantially since 2007. Most of this increase in debt is in property.

If the interest rates increase, the RBNZ warned of an increased risk of borrower default if the borrowers cannot service their debt. Further, the business cycle may turn and the boom NZ is currently experiencing (the rockstar economy) may reverse and in a downturn, incomes may drop also putting financial pressure on borrowers.

The RBNZ also noted that house price inflation has moderated, partly due to loan-to-value ratio restrictions and tighter lending conditions. It is uncertain whether this moderation will be sustained given the continued imbalance between supply and demand in some areas of the country.

Although the OCR was being held constant, mortgage interest rates are likely to rise because there is not enough domestic savings to keep up with the lending, so lenders have to borrow money from expensive international wholesale markets. Naturally, lenders are passing on the higher funding costs to the borrower.

Over time, landlords are expected to charge higher rents to compensate for higher mortgage repayments. So in the next few years, be prepared to see increases in rents in areas near the CBD and near good school zones.

Finally, Graeme Wheeler cited a number of uncertainties in the international outlook so it is unlikely the OCR will rise any time soon.

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