Record OCR on hold, but could get lower

  • 28/01/2016
Record OCR on hold, but could get lower

By Ranjani Ponnuchetty

The Reserve Bank has left the Official Cash Rate at a record low of 2.5 percent.

Homeowners received four rate cuts last year, and the Governor Graeme Wheeler indicates even lower interest rates later this year.

Headline inflation is persistently low, it's currently almost at zero. But the central bank wants it to be between 1 and 3 percent.

This is putting pressure on the Reserve Bank to lower interest rates to stimulate the economy but they're being cautious as house price inflation in Auckland remaining a financial stability risk.

Mr Wheeler says the financial market volatility has increased. He expects the New Zealand economy to grow this year, despite the global conditions.

"Growth is expected to increase in 2016 as a result of continued strong net immigration, tourism, a solid pipeline of construction activity and the lift in business and consumer confidence."

This was reflected in NZIER's latest business confidence survey, where confidence rebounded from a four year low at the end of last year.

Mr Wheeler says in recent weeks there's been some easing in financial conditions as the dollar exchange rate and market interest rates decline. However, he says a further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices.

While there are signs the rate of increase in Auckland house prices may be easing, house price pressure is building in other regions.

Towards the end of last year, the Reserve Bank expected headline inflation to reach the target range early this year but now says it could take longer mainly due to falling fuel prices.

Mr Wheeler says future policy easing may be required over the coming year.

This means interest rates could be down to levels New Zealand's never seen before which will be welcome news for mortgagees.