Interest rates expected to remain at current levels in short term

Time was running out for homeowners with floating mortgages to decide whether or not to move to a fixed-term rate, Craigs Investment Partners broker Chris Timms said yesterday.

As expected, the Reserve Bank left the official cash rate unchanged at 3% and most financial commentators believe March will be the earliest the central bank will lift rates.

That indicated floating mortgage rates would remain at current levels but any sign nflation was increasing would mean retail banks increasing their floating lending rates.

"The OCR has lost some of its impact except on short-term interest rates. With the economy expected to stay flat, we are not expecting a rapid movement in interest rates.

"Close to March, we expect to see interest rates move upwards in anticipation of the OCR being lifted."

Longer-term rates would stay high because banks were being forced to borrow off the domestic market to cover a proportion of their lending, he said.

That would be good for investors.

However, shorter-term deposit rates had eased slightly, possibly as a result of the return of money to South Canterbury Finance investors through the Government's retail deposit guarantee.

Those investors were not natural holders of shares and were more likely to have put the money into a bank on three or six-month terms, Mr Timms said.

Reserve Bank governor Alan Bollard said that despite some data turning out weaker than projected, the medium-term outlook for the New Zealand economy remained broadly in line with that assumed at the time of the bank's September Monetary Policy Statement.

"Continued household caution had seen consumer spending and housing market activity remain muted and many firms have become less optimistic about their future prospects.

"Continued high export prices, along with reconstruction and repairs in Canterbury, will support activity over the coming year."

Headline inflation was expected to move higher following the recent increase in the rate of GST, he said.

The subdued state of domestic demand suggested the inflation spike would have an impact on inflation expectations in the medium term.

While it was appropriate to keep the OCR on hold now, it remained likely that interest rates would need to rise at some stage, Dr Bollard said.