Will Interest Rates Rise? The Guessing Continues

The guessing game has started again, When will interest rates rise? Every time the RB is due to make its monthly statement, out come the economists with their  predictions. Eventually they will be right. It is much like the old adage that  if you put a typewriter into a monkey cage, eventually they will type out Shakespeare.

My pick is that rates will be on hold for as long as the rest of the world stays low. It simply doesn’t make sense to raise rates while the world’s main economies are still at close to zero interest rates. If we see a move there then maybe it will be our turn. Even then any increase would be no more than a quarter of a percent, which would have little or no effect on property prices.

The Reserve Bank is expected to sound another warning about rising house prices this week, and may be forced to start lifting interest rates by the end of the year, according to some economists.

The Reserve Bank is due to issue its latest Monetary Policy Statement on Thursday and was expected to hold official interest rates again at 2.5 per cent.

Westpac Bank economists said that the statement would “almost certainly” include a warning that if house prices continued to rise too rapidly, the official cash rate would need to rise earlier than previously forecast. Westpac is picking the first move up in December.

But Deutsche Bank said it was “most likely” the OCR would remain on hold for the rest of this year, with inflation still benign, a weak job market, a higher currency and a worsening drought in many parts of the country. It tipped the first move up in early 2014.

The Reserve Bank was also expected to point out that local economic activity had been stronger than expected in recent months, though inflation had been lower and the dollar higher, rising 4 per cent since December against a basket of currencies.

The drought declared in many parts of the North Island was expected to be seen as an important “downside risk”, Westpac said, but may not be included in the Reserve Bank’s economic projections.

Last week, the Government warned that the big dry affecting large parts of the country could cost the economy $1 billion. Primary Industries Minister Nathan Guy extended the drought area, already in place in Northland, to cover South Auckland, Waikato, Bay of Plenty and Hawke’s Bay. ANZ also puts it at $1 billion and counting.



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