OCR rise reaction: Retailers feel nervous, economists more optimistic

The official cash rate (OCR) rise is causing mixed reactions among experts, from nervousness to optimism.

Retailers say it could drive up interest rates and spook consumer confidence, but some economists argue it shows the strength of the economy.

The Reserve Bank raised the OCR yesterday to tackle inflation by 25 basis points to 2.5 percent and signalled more would follow this year.

This was the first rate rise in in more than three years.

Retail NZ chief Carolyn Young said the benchmark rate was a "really blunt instrument", but it was the only instrument the Reserve Bank had to manage inflation.

She said retailers were nervous and would watch the outcome closely, as consumers thought carefully about how much they could spend.

"I think there's a real risk that for consumers, the knowledge that next time they go to refix their mortgage, it'll be at a higher rate and therefore it'll dip into their disposable income more," she said.

"That will make them cautious and concerned around what's actually happening and where's the value of their property? How much do they owe? Can they make those repayments?"

She said consumer confidence was imperative to get a sense of the direction of the economy.

Retail NZ's latest surveys from before the US-Iran peace talks revealed low consumer confidence.

And while economists expected it to bounce back after the talks and a drop in fuel prices, the rate rise could hold back that recovery.

However, property analyst firm Cotality's Kelvin Davidson said rising interest rates would not make much difference to the market.

He said higher rates had been widely expected and were already mostly factored into the property market.

He said long-term mortgages were funded through wholesale markets, which were helmed by forward-looking traders who had anticipated the rate rise and already priced it into mortgages.

"This move today actually just sort of delivers on what the markets had already been expecting," he said.

He said higher interest rates might hurt retail confidence but that consumers should look at them as a "positive".

"There's no free lunch in economics. And so, yes, you get higher interest rates, but the reason why interest rates tend to go up is because an economy is growing."

He said it showed the Reserve Bank thought the economy was strong enough to raise the rates, and the rise would keep inflation in check.