The Reserve Bank's first review of its Official Cash Rate today has left it unchanged at 4.5%, with the continued outlook for more stable short-term interest rates.
The review follows hard on the heels of inflation figures for the three months to March, announced yesterday, which showed annual deflation for the first time in more than 50 years. The Consumers Price Index fell by 0.3% in the March quarter, with mortgage interest costs alone 19% lower than a year ago.
While that news caused some last-minute talk of a lower OCR, most commentators had still anticipated the rate to remain unchanged in line with the Reserve Bank's 'steady as she goes' philosophy.
When the OCR was first announced on March 17, it was slightly higher than expected and pushed 90-day bank bill rates - a key indicator for floating mortgage rates - up from 4-4.5% close to 4.67%. That increase was absorbed by the main mortgage providers, who kept their floating rates unchanged around 6.5%.
The gap between 90-day rates and mortgage rates is where banks make a good chunk of their money, with anywhere between 1.75 to 2 percentage points generally considered a comfortable margin. However, Bancorp economist Stuart Marshall maintains that banks can still make a "reasonable" living from 1 to 1.5 points - "although they don't like doing it for long".
The Reserve Bank hopes the OCR, now its main focus for monetary policy, will mean short-term interest rates are much less volatile and is tipping the benchmark 90-day rates to stay around 4.6 per cent until the end of next year. The OCR effectively sets a base for other interest rates: its advent takes the spotlight off the Bank's Monetary Conditions Index (MCI) which measures the exchange rate as well as interest rates.
Bancorp's Stuart Marshall again: "When the Reserve Bank came out with the OCR, they also came out with their view of where they saw monetary policy going over the next two years. It should bring stability compared with the situation previously under the MCI, when we saw 90 day bank bills (moving) all over the place.
"And they're not expecting to make changes (in the OCR) unless something pretty dramatic happens in the intervening time."
That said, the Reserve Bank Governor himself has flagged some "important risks" to keeping rates low: "Inflationary pressures could turn out to be stronger if households respond to low interest rates by spending even faster than predicted, largely by taking on more debt."
The Reserve Bank has said it will review the OCR approximately every six weeks. However, the next review is now expected to be in just a month's time on May 19, the day before the Budget.
