Disappointment at OCR rise

Disappointment at OCR rise

The CTU is disappointed at the 0.25 percentage point rise in the OCR, which will lift the cost of a $200,000 floating rate mortgage by about $10 per week. Interest rates are forecast to continue to rise, with 90-day interest rates predicted to increase from the current 2.9 percent to 4.2 percent in March 2011 and 5.6 percent in March 2012, further increasing the cost of mortgages.

“We welcome the Bank’s continued caution about further rises however, particularly in the light of continued international instability,” said CTU Economist Bill Rosenberg. “Difficulties in international funding will continue to affect fixed term interest rates and we also welcome the Bank’s actions to wean the banking system off international short term borrowing.”

“Business investment, with firms currently focused on paying down debt, continues to be a concern. Banks are continuing the tighter lending criteria they established during the financial crisis. The rise in interest rates will not help. Renewed business investment is important for employment growth.”

“If the banks do not come to the party, the Government should be looking at establishing a specialist financial institution providing development finance. The Reserve Bank should also be looking at alternatives to the use of interest rates to control inflation. These could include use of conditions on loans and bank capital requirements.”

The Reserve Bank is slightly more optimistic about inflation than Treasury, but expects it to peak later, forecasting a 4.8 percent increase in the CPI in the year to March 2011 and an annual rate of 5.4 percent reached in the June 2011 quarter. Underlying inflation is forecast at 2.0 percent in March and 2.6 percent in June. (Underlying inflation “excludes the direct inflation impacts of the increase in the rate of GST, increases in the excise tax on tobacco and the incorporation of the stationary energy sector in the Emissions Trading Scheme”.) Wages, measured by the Labour Cost Index are forecast to rise by only 1.9 percent in the year to March 2011 and 2.9 percent in the year to March 2012 - just above forecast inflation rate of 2.8 percent.

ENDS

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