Media Release
9 February 2007.

The Canterbury Manufacturers’ Association says that the Government’s proposed scheme to levy mortgages could be very useful as a further tool to control drivers of domestic inflation that seems to be well out of reach of the OCR.

Chief Executive John Walley says that inflation controls improve by increasing the exposure of fixed term mortgage borrowing to the OCR. “People may respond to the levy by switching to a floating mortgage rate. If more people take this option then any changes to the OCR will have a more immediate impact on the housing market as the costs of borrowing will respond to OCR changes more quickly. – that has to be a good thing for the tradable sector”, says Mr. Walley.

“Borrowers may not respond to the levy and stay on their fixed rate. As a result, the higher cost of fixed mortgage payments alone will be pushing back against domestic inflation. Either way we have better control of domestic inflation. If that it is insufficient more pressure could be applied by the same mechanism”.

Mr. Walley says that the tradable sector will only be boosted by lower exchange rates or the expectation of lower interest rates and lower exchange rates.

“This proposal is a long overdue supplementary measure aimed at attacking inflation where it is happening, the housing market, but don’t expect overnight changes. The pain in the tradable sector is deep and meaningful and will take a while to dissipate”.

ENDS

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