The Reserve Bank of New Zealand Board did not raise the Official Cash Rate (OCR) from the record low of 2.5 percent on April 29. However, many economists throughout New Zealand are predicting that the Reserve Bank will raise the OCR in the June review.

Although the Reserve Bank Governor, Alan Bollard, said there were some positive signs of economic recovery in New Zealand, he said, “risks to the global outlook remain elevated”. He implied raising the official cash rate at this time would give New Zealand a disadvantage as the world recovers from the Global Financial Crisis.

Mr Bollard said, “Trading partner activity has recovered more quickly than we expected.” He said that growth in Asia had been strong and this had increased export commodity prices for New Zealand exporters to close to the peak in 2008. These are positive indicators for the overall recovery of the New Zealand economy in the global future.

“Overall, we are emerging from the crisis with some reconstruction of our external deficit, as a result of strong exports, weaker import growth, suppressed domestic profits, and some consolidation of balance sheets,” Mr Bollard said.

Although the exports are currently strong, helped by the New Zealand exchange rate, Mr Bollard expressed concern about the levels of household spending and business credit.

“New Zealand households remain cautious, with the housing market and household credit growth subdued,” Mr Bollard said. While the official cash rate remains low, investors are more likely to buy into the property market, so the Reserve Bank Board has tried to keep the rate low to build up spending levels in the housing market. Mr Bollard did say that householders were building up savings and reducing debt.

Mr Bollard said that New Zealand business was “bruised, but not permanently scarred,” by the Global Financial Crisis. He said that business people were very cautious about accepting credit from banks to invest in plant or equipment or to re-employ staff. This means that unemployment rates are still relatively high across New Zealand.

“We certainly wish to see credit available for all sound business ventures,” Mr Bollard said. He implied that the banking sector was too restrained in accepting loan and credit applications from small and medium businesses in New Zealand, effectively reducing the need to increase the official cash rate yet.

In a statement that same week, Mr Bollard said the stage was set for the Reserve Bank to influence the pace of recovery through “more conventional discretionary monetary policy”.

“Using a truck driver analogy, our foot is strongly on the accelerator. Over coming months, we expect to reduce the pressure on this pedal, but in effect to keep some throttle going,” Mr Bollard said in his statement. He continued the analogy with, “We do not expect to have to touch the brake pedal for some time.” This implies that the official cash rate may not actually rise in June as some economists are already predicting.

Economists from JP Morgan said that the Reserve Bank was “readying to remove the policy stimulus,” but it was unclear when the rate would rise. “It will depend on how the economic data evolves” over the next few weeks. The positive employment figures released on Thursday May 6 may indicate a June rate rise.

Meanwhile, economists will continue to watch the figures on the housing market, the business sector, and the employment figures to confirm whether the Reserve Bank will in fact raise the official cash rate in June or not. Despite the stimulus, the housing market is still subdued, which means it can be the ideal time to purchase property.

Investors have the opportunity to lock in low interest rates on a mortgage while the official cash rate remains low. Even when the rate does rise, it is unlikely to rise too many times until the end of the year. The Reserve Bank has shown cautiousness in raising the rates, despite economists’ predictions in the past. While the possibility of a small rate increase exists for June, it is not likely that will negatively affect those in the market for an investment property. While the rates cannot continue at this historic low rate, the rises will be small over the next few months.

Although the New Zealand Reserve Bank did not raise the official cash rate this time, it is likely that a small rate rise will occur in June in the next review. Nevertheless, investors in property will find low interest rates will continue for the next few months, as economists are predicting only small rate rises as the New Zealand economy continues to recover.