The Governor of the Reserve Bank of New Zealand, Alan Bollard, announced on Thursday, March 11, that the official cash rate would remain at the record low of 2.5% for another month. In his speech announcing the decision, Mr Bollard said the New Zealand economy was recovering “broadly as expected.” Despite the indications of growth in the economy, the Reserve Bank has held off on incorporating monetary stimulus into the policy at this point.

Mr Bollard said the New Zealand economy had grown at a stronger pace in the December and March quarters than in the prior two quarters. “Looking forward, while growth is expected to increase to about 4% next year, this is subdued relative to previous recoveries,” he said.

The continuation of the record low official cash rate means that New Zealanders looking to get into the property market or to undertake a second mortgage for an investment property have an ideal opportunity to do so, as the low interest rates make mortgages more affordable.

The rate is likely to rise slowly in mid-year, but the Reserve Bank has been extremely cautious about raising the rate in the past few months and it is unlikely to rise the rate at a fast pace. Economists are predicting the Reserve Bank will raise the official cash rate to 3.75% by the end of the year, starting with a .25% rise in June or July.

Meanwhile, the Reserve Bank of Australia has lifted it’s official cash rate to 4%, widening the rate gap. This is helping to drive the New Zealand dollar to a 10-year low against the Australian dollar. In his speech about the OCR, Mr Bollard said that the growth in trading partner activity with Australia and China was helping the New Zealand economy, but said the growth pattern was “much more muted in other trading partners”.

“At the same time, risks around the global outlook have increased, although not to the extreme levels seen at the height of the crisis,” Mr Bollard said. The Reserve Bank is not yet concerned about reining in inflationary pressures, reducing the need to increase the official cash rate to curb spending. Mr Bollard said the annual CPI inflation rate of 2% was expected to “track within the target range over the medium term.” He did add that the implementation of the amended Emissions Trading Scheme and increases in the ACC charges would push the CPI inflation toward the top of the target range in the short-term.

Meanwhile, household spending in New Zealand is still relatively low, with householders cautious about house sales and taking out new credit, despite the low interest rates available at the moment. Mr Bollard said that policy stimulus and improved consumer confidence had seen a rise in household spending. However, he said that spending in the business field was still weak, despite improved confidence in the business arena.

Mr Bollard implied that the official cash rate would be unlikely to rise too dramatically in the near future, due to the combination of the fiscal policy consolidation and higher bank funding costs. “We expect these costs to persist over the projection reducing the extent of future increases in the OCR,” he said. “We continue to expect to begin removing policy stimulus around the middle of 2010.”

This statement from the Reserve Bank shows that the recovery from the recession has been slower than expected throughout New Zealand. The unemployment rate has reached a 17-year high. Consumers have reduced spending on debit and credit cards overall. Importantly for the mortgage industry, there has been a reduction in the building and development consents sought, so fewer new properties are entering the market. This will have an impact on house values and property sales, as demand starts pushing the price up on good properties.

While the official cash rate remains low and is unlikely to rise above 4% this year, New Zealanders have the perfect opportunity to take advantage of the low rates and purchase property. Property values are likely to increase over the next few years, so buying now with low interest rates and lower property prices makes good financial sense. The New Zealand economy is certainly improving, but at a slower rate than previously expected. This means the OCR is likely to stay at lower rates for longer than economists were predicting earlier in the year.