Breathing space for homeowners

Homeowners with floating mortgages can breathe easy for another few weeks after the Reserve Bank yesterday left the official cash rate unchanged at 2.5%.

It is near certain the rate will rise in March with Reserve Bank governor Graeme Wheeler saying there was a need to return interest rates to more normal levels because inflationary pressures were expected to increase over the next two years.

''The bank expects to start this adjustment soon.''

Westpac chief economist Dominick Stephens said Mr Wheeler's announcement was much as he expected.

''The economic case for hiking the OCR is clear but the Reserve Bank is better off waiting for the superior communication opportunity offered in the March Monetary Policy Statement before actually pulling the trigger.''

Labour Party leader David Cunliffe was quick to blame the looming rate hikes on the Government. National's ''inept'' response to skyrocketing house prices and rising rents would heap more pain on homeowners, renters and first-home buyers with interest rates soon to rise.

If mortgage rates were ultimately to rise to 8% - as had been suggested by some economists - for someone currently on a 5.75% rate, it would add $136 a week to a $500 a week mortgage.

Interest rate rises would also cause an increase in rents, adding to the cost of the living burden for many low-to-middle income families who could not afford a house, who were working harder than ever and were struggling to make ends meet, he said.

First-home buyers would be hit especially hard by rising mortgage costs, which came on top of the introduction of high-loan-to-value ratios (LVRs) last year.

''The Government and Reserve Bank must now admit they got LVRs wrong. It's time to exempt first-home buyers. National has repeatedly claimed credit for low interest rates. They now have to take responsibility for looming rate hikes,'' Mr Cunliffe said.

Mr Stephens said the Reserve Bank acknowledged there had been some moderation in the housing market.

However, some moderation was expected following the high-LVR mortgage restrictions and was probably already factored into the central bank's forecasts.

''All up, the Reserve Bank seems to be a central bank calmly preparing for a well-signalled and steady series of OCR hikes.

"Yes, the total size of the hiking cycle will be slightly larger than previously signalled. But there were not signs of panic in this press release.''

Mr Wheeler said in his statement annual inflation was 1.6% in 2013 and forward-looking measures of firms' pricing intentions had been rising.

Construction costs were increasing and risked feeding through to broader costs in the economy.

At the same time, there appeared to have been some moderation in the housing market in recent months.

The high exchange rate continued to dampen inflation in the traded goods sector, but the bank did not believe the current level of the exchange rate was sustainable in the long run.

The central bank remained committed to increasing the OCR, as needed, to keep future average inflation near the 2% target mid-point.

The scale and speed of the rise in the OCR would depend on future economic indicators, Mr Wheeler said.

Overseas, South Africa's Reserve Bank made a surprise decision to raise interest rates, amid fears of rising inflation and sustained pressure on emerging market currencies.

At a scheduled policy meeting, the central bank raised the main rate by 0.5% to 5.5%, the highest level since July 2012.

It was widely expected South African rates would be left at multi-decade lows amid weak growth and high unemployment.

Earlier, Turkey's central bank doubled interest rates to more than 10% in the face of its own currency crisis.


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