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Today’s decision to raise the official cash rate (OCR) is in line with expectations, Cotality’s chief property economist, Kelvin Davidson says.
“[It reflects] the ongoing need to bring inflation back down to the 1-3 per cent target band but also hints from the Monetary Policy Committee that the economy will be strong enough to absorb the hit. Fixed mortgage rates may not react too much in the near term.”
Earlier this afternoon, The Reserve Bank of New Zealand raised the OCR by 25 basis points, up 0.25 per cent to 2.75 per cent.
“Looking beneath the surface, the economy certainly isn’t racing away, but there have been a few more encouraging signs recently. In addition, while inflation hasn’t perhaps spiked as much as might have been feared given the scale of fuel price increases (and a weaker exchange rate), it’s still too high, and the risk of second-round price effects hasn’t disappeared yet. This all tends to justify a measured or cautious approach to further monetary policy tightening.”
The decision from the committee was unanimous and the associated commentary points to further OCR rises to come, he says.
“However, the next rise may not necessarily be on October 28, if the incoming data between now and then has a softer flavour.”
The housing market will follow a further sideways trend, Davidson predicts.
“There’s nothing much to alter the broad expectation for a further sideways trend in both sales volumes and property values. The mood amongst buyers and sellers certainly remains fairly cautious, and those with mortgages will be wary of the recent interest rate increases on popular terms such as the two-year fix.
“Although floating rates may well shift higher to some extent, it’s arguably already been priced in to prevailing fixed rates, so they might not show too much movement in the coming days. Of course, looking out over the next few months, there still seems a greater likelihood of higher mortgage rates rather than flat (or down),” he says.
Resilience of employment, even though a greater labour supply is lifting the unemployment rate, will tend to offset the housing effects of higher interest rates to some degree, Davidson adds.
However, an expected wild card still threatens to undermine predictions.
“The looming election is another key factor at the moment, especially for property investors as they wait any indications from the opposition about interest deductibility.”
