Lag in rates’ fall seen

Press, 4 April 1989, Page 38

Lag in rates’ fall seen

PA Wellington Mortgage interest rates will not move down significantly in the next six months in spite of the Minister of Finance, Mr Caygill’s, commitment to cut the financial deficit, the DFC New Zealand economist, Roger Garrett, predicts. They would be held up by a rise in inflation and inflationary expectations, arising from Mr Caygill increasing the GST rate, the depreciation of the New Zealand dollar and inflation overseas, Mi Garrett said in the DFC’s “Financial Fortnightly” publication. He predicted the level of real interest rates — the margin of nominal rates above the rate of

inflation —- on benchmark five-year government bonds would decline because of the fall in the deficit to 1 per cent of gross domestic product in 1989-90. As the Government’s borrowing requirements were reduced, the real interest rate on the bonds would decline from 8 per cent now to about 7 per cent after the rise in GST on July 1, he said. However, as the one-off influence of GST "passes through the system” mortgage rates should start to decline, Mr Garrett said. Mr Caygill might not achieve the intended outcome of increased investment by removing uncertainty and boosting business and household con-

fidence, he said. This wa< because Mr Caygill “com promised" the impact o the deficit cut by raisinf GST and the corporate ta> rate, which would inhibi investment moves, hf argued.