Surprise. The Reserve Bank has just increased the Official Cash Rate (OCR) from 5.25 per cent to 5.75 per cent.
The move was widely expected, as are further OCR increases this year. However, a number of major lenders said this morning that a 50 point increase at this review was already built into floating and short-term mortgage rates.
Trading banks are currently offering floating rate loans around 7.6 per cent, while other lenders are as low as 7.10 per cent.
The OCR was brought in a year ago as a monetary policy tool. It was originally set at 4.5 per cent, at a stage when most bank floating rate loans were 6.5 per cent.
Reserve Bank Governor Don Brash said this morning that the latest OCR increase reflected the fact that the economy has been growing since mid 1998 "to the point where, in our judgement, the spare capacity evident over the past two years or so has been almost completely used up".
He said that, while inflation presented no immediate threat, the downward pressure on inflation from surplus productive in the economy had all but gone. Moderate action now reduced the risk of having to take more vigorous action later.
An important issue, however, was how the exchange rate moved and why.
"If the exchange rate remains at a low level because of weak commodity prices, for example, there may be no need to adjust monetary policy," Brash said.
"But if the exchange rate remains low despite improving commodity prices, then overall demand pressures may grow and may require more tightening in monetary policy than now projected. At the moment, the Bank is reserving its judgement on this."
