OCR hike in June if share markets don’t collapse 20%

The Euro-zone crisis is a reminder to borrowers that credit availability is not what it was and is never going back there, says BNZ economist Tony Alexander.  

Monday, May 31st 2010, 1:13PM

In the BNZ Weekly Overview he says banks are having more difficulty borrowing funds in the European market with the cost of doing so increasing which is likely to manifest itself in New Zealand.

The crisis in Europe has pushed swap rates down on falling inflation worries but the extent to which these declines feed through into rates facing NZ retail customers will be limited if not completely offset by rising liquidity premiums to fund offshore.

Alexander says BNZ remains of the opinion that unless sharemarkets collapse another 20% in the next fortnight the Reserve Bank will raise the official cash rate (OCR) 0.25% on June 10 and indicate plans to raise the rate steadily from then on.

"But with an eye to changing the pace if conditions turn out to be weaker or stronger than they expect," he says.

The advice for borrowers is to still toss a coin between staying floating and opportunistically hopping into a one to three year fixed rate.

Alexander says at the margin the risk remains that the Reserve Bank does not take the official cash rate in a straight line manner to the 6% level it has pencilled in for early 2012 and that suggests those choosing to stay floating won't necessarily be worse off than fixing out to then.

"Note as ever however that no-one can avoid higher funding costs if they face a fixing decision now because of the risk floating rates are near their peaks in three years time," he says.

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