OCR in holding pattern till 2020

‘‘The biggest risk is probably around protectionism.’’ Graeme Wheeler Reserve Bank governor

New Zealand’s benchmark interest rate could stay at a record low until 2020, but borrowers could still face rising mortgage rates driven by global protectionism.

In its first review statement of 2017, the Reserve Bank left the official cash rate (OCR) at 1.75 per cent, and indicated that it could sit unchanged for at least three years.

Governor Graeme Wheeler said that despite an economy that was performing strongly, it was likely that it would take time for inflation to return to a level that would make increasing the OCR necessary.

‘‘Over time, perhaps two or three years, we might start to see OCR increases,’’ Wheeler said.

But he warned this may not keep household borrowing rates low. Estimating that mortgages had increased by about 50 basis points from recent lows, Wheeler said the future for borrowers would be dictated by global events, especially those in the United States.

‘‘The long-term outlook for mortgage rates will very much depend on what happens to longterm interest rates and that will very much depend on what happens globally, but particularly in the US, and where the US goes with fiscal policy,’’ Wheeler said.

Since Donald Trump became president of the United States, financial markets have begun forecasting ‘‘Trumpflation’’ – inflation sparked by debt-fuelled spending and the introduction of tariffs.

Trump has vowed to impose hefty tariffs on imports from both China and Mexico, two of its largest trading partners.

The US Federal Reserve is already expected to raise interest rates in 2017, and the path of higher borrowing costs could be steeper if inflation rises.

Wheeler said a number of international pressures could push up borrowing costs, including Britain’s planned exit from the European Union, and China’s debt position.

‘‘I think the biggest risk is probably around protectionism,’’ Wheeler said.

‘‘Let’s say the US did get serious around imposing 45 per cent tariffs on China, for example, or large tariffs on Mexico. That will have serious implications for the global economy.’’

Before yesterday’s statement, financial markets had expected that the Reserve Bank would raise the OCR before the end of the year, despite bank economists forecasting that it would be unchanged until at least the start of 2018.

‘‘We think the market assessment has got a bit ahead of itself,’’ Wheeler said after the statement was released.

The New Zealand dollar dropped about half a cent against the US dollar after the statements, with the Reserve Bank now forecasting that inflation will not hit 2 per cent – the middle of its target band – until some time in 2019.

‘‘[T]he message is that the OCR is not going anywhere in a hurry,’’ ANZ chief economist Cameron Bagrie said.