Time to tighten belts - 09 Dec 2007 - NZ Herald: New Zealand Business and Personal Finance News

Borrowers will be in for some more belt-tightening next year following the Reserve Bank's move last week to stay the course with its high interest rate policy.

Economists say an official rate cut is still some way off - the consensus being sometime late next year - but that could quickly change if the US economy starts to tank.

As it stands, borrowers could be in for increases of 0.7 to 1.5 percentage points next year.

The Reserve Bank's decision to keep its official cash rate at 8.25 per cent is in contrast with recent decisions made by many of its northern hemisphere counterparts.


BS New Zealand economist Robin Clements says other central banks are clearly becoming more concerned about higher financial costs, financial instability and risk aversion from the credit market turmoil spilling over into pessimism, lower growth and lower lending.

Clements says the Reserve Bank feels it needs to batten down the hatches, not only because of the higher food and fuel prices, but also because of the expected stimulatory effects of higher dairy returns and the prospect of tax cuts arising from next year's election.

"It does seem to be an interesting contrast, especially because these other central banks have been making their decisions in recent weeks, so they are facing the same information set, and yet the Reserve Bank seems to be that much more circumspect about it all," he says.

ASB bank chief economist Nick Tuffley says the differing positions of central banks is a reflection of their economies being at different stages. "Also the crisis is affecting countries in different ways so, arguably, out of all of those, we would be the least affected so far."
So the official rate could jump to between 9&#37; and 10.5%. Wow, wow, wow. I guess the silver lining is that such a change would cool the upward pressure on housing prices, but if you're a migrant who doesn't have the cash on hand to purchase your house outright, it's going to make buying a home here much less appealing (and, frankly, much less likely).

It's funny because they are citing as a key factor for ramping up interest rates the likelihood of a tax cut. So money goes in one pocket and comes right out the other ... I understand how inflationary pressures work, but this is making the Labour Government sound more like a Republican administration back in the US. 'Can't give poor and middle class people more money in their pockets--they'll only spend it!"

I wonder what affect this is going to have long-term on the already poor (and declining) rates of home ownership here?