Brian Berry - Financial Advisor
	Straight forward, quality financial advice - so you can get on with the fun stuff in life. Click to view Rothbury's website.

Once again financial markets have hit the proverbial fan and it's been carnage in sharemarkets around the world in the last week.

What's the driver for this? Well, it is still the problems in the Eurozone that are primarily giving the markets the jitters. The highly publicised problems in Greece appear to be just the tip of the iceberg and financial markets are starting to wonder whether there is a realistic resolution to the issue of whether several countries may default on their debts.

The problems in Europe and in world markets place conflicting pressures on interest rates and the only certain thing at present is that there is a lot of uncertainty out there! We can't control what happens overseas, but in NZ, to a degree, we can. The Reserve Bank is really in the driver's seat here and can determine what interest rates do by using its main Monetary Policy tool, the OCR (Official Cash Rate).

The Reserve Bank's main task is to control inflation and policies implemented now have both effects now, and up to 18 months to two years down the track.

So, going back just over a week, it looked a practical certainty that the OCR would be increased on June 10 as the NZ economy is/was on track with Reserve Bank predictions of the likely recovery and inflationary pressures looked quite high through 2011. These latest offshore developments are a real fly-in-the- ointment and have created serious doubts for that June 10 start date. Saying that, inflationary pressures are building here and the Reserve Bank needs to decide whether the world situation creates enough doubt about whether those pressures will be sustained.

The uncertain nature of world markets at present raises the same old question for borrowers - just how much certainty do you want in an uncertain environment when the main threat is for interest rates to trend upwards? The uncertainty relates to the amount of the increases, the timing of the increases and once underway, how long will the increasing cycle last and just how long will it plateau for at the top? Even the Reserve Bank doesn't know the answers!

If we fix our rates now and rates stay low for longer than expected, then we have missed out on the cash flow benefits of those lower rates, but we may have been able to sleep at night and I guess that is the trade-off decision we have to make.

I have had several clients take a mix of rates recently - the mix being some on the variable rate, some on the 18 month rate and some on the two year rate. They therefore have a foot in either camp. They may accrue the cash flow benefits on a portion of their debt on the variable rate if that rate takes longer to rise, whilst still enjoying certainty for a reasonable period and on a reasonable portion of their debt for the 18 month and two year terms, which still offer good discounts to their five year averages.

As we have seen, a week is a long time for financial markets and who knows what the coming week will bring. We are getting close to June 10 and that date is still the likely start date for increases in the OCR, but offshore developments are putting that scenario at risk.