On June 10, the Reserve Bank of New Zealand raised the official cash rate to 2.75%, a .25% increase to the record low rate of 2.50%, which has been the official cash rate since April 2009.

Mortgagees will pay an average of an extra $30 to $50 per month on a $300,000 loan when the banks pass on the rate rise. However, since this is the first time the Reserve Bank has raised the official cash rate in a year from the record lows mortgagees have been enjoying, this amount is unlikely to affect most mortgage holders too adversely.

When making the announcement, Reserve Bank Governor, Alan Bollard, said the economic recovery was in its second year and that growth was more “broad-based” now.

Mr Bollard said economic growth in Asia was particularly strong. “Along with ongoing growth in Australia and recovery in the United States, this has so far offset weak growth in some other export markets,” he said. New Zealand’s export commodity prices increased and therefore export incomes rose, as trading partners experienced economic recovery giving consumers more buying power again.

“In New Zealand, growth of around 3.5 percent is expected this year and next,” Mr Bollard said. While the Reserve Bank economists expect higher export prices, the improving labour market, and a pick up in residential and business investment to drive the economy into further signs of growth and recovery, they also expect households to remain cautious. This should subdue the housing market and credit growth. “This moderate household spending contributes to some rebalancing in the economy,” Mr Bollard said.

Mr Bollard said that given this outlook, the Reserve Bank had decided to begin removing some of the monetary policy stimulus that was in place in the New Zealand economy, but that the Reserve Bank would review further removal of stimulus “in light of economic and financial market developments”. This cautious statement relieves fears that the Reserve Bank will simply continue to raise the official cash rate each month. However, most economists are expecting further cash rate rises over the next six months.

Mr Bollard said that some of the factors that would reduce the extent to which the official cash rate would need to be increased were higher bank funding costs, higher long-term interest rates, and borrowers using floating rate mortgages.

However, there was a negative expectation that inflation would rise. “Headline consumer price index inflation will be boosted temporarily by the announced increase in GST and other government-related price changes,” Mr Bollard said. “Provided households and firms do not reflect this price spike in their wage and price-setting behaviours, we do not expect a lasting impact on inflation,” he said.

In the full report on the monetary policy, Mr Bollard said that businesses were improving balance sheets by reducing debt. “Those that have increased output appear to have done so by increasing the number of hours worked by staff or by hiring new workers, rather than through capital investment.” Therefore, employment is increasing and the unemployment rate will continue to trend lower over the next few months, which could put some pressure on wage inflation again.

Mr Bollard said that demand for finance was likely to increase as the domestic recovery progressed. “It is important that creditworthy businesses and households can access finance on reasonable terms,” Mr Bollard said. “The New Zealand banking system should be well placed to do this, particularly in the light of the sector’s reduced reliance on short-term wholesale funding.” This means that while banks may remain somewhat cautious, it may become easier to access finance as lending standards will ease over the next few months.

With greater access to finance as the economy improves, investors will have more opportunities to purchase properties, while continuing to pay low rates on the loan. This official cash rate increase is the first in a year and the rate remains very low at 2.75%. While economists do predict further cash rate rises over the next six months, it is unlikely that the rate will rise beyond 4% before Christmas, giving investors many opportunities to cash in on the low rates.