Here is an economic update from the National Bank split into the question what has happened and what it may mean for you. Enjoy ...

What happened?

As expected, the Reserve Bank kept the Official Cash Rate (OCR) at 2.5% in their latest review on 11 March 2010. This was the seventh time in a row the Reserve Bank has held the rate steady at 2.5% since it reached this level in April 2009.

The Reserve Bank said the New Zealand economy is recovering broadly as they expected. Activity remains patchy - household spending has picked up; house sales and credit growth are subdued.  However, they expect growth to increase to around 4% next year, which is relatively modest compared to previous recoveries.

They also noted some increase in inflation pressures in the short term due to the impact of the Emissions Trading Scheme and increases in ACC charges, although they expect it will remain within their target range over the medium term.

What does it mean?

In their statement the Reserve Bank again said they expected to begin removing policy stimulus (and begin increasing the OCR) around the middle of this year.

Our economists (National Bank) expect a slightly later start to the tightening cycle.  At this stage they expect to see rates beginning to rise from September 2010.

How does the OCR affect home loan interest rates?

The OCR is set every six weeks by the Governor of the Reserve Bank.  The Governor sets this rate to manage inflation, based on what’s happening in the economy.  The OCR is one of many indicators, including overseas interest rates and wider economic developments, that affect short term interest rates such as floating rates and one and two year fixed lending rates.