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.

As expected the Reserve Bank took the opportunity to increase the OCR (Official Cash Rate) last Thursday, by 0.25 per cent to 2.75 per cent. I have been holding off writing this blog so that I could comment on home loan rate changes that have since been made, but at the time of writing (11am Monday, June 14) there has been none - a major surprise!

We would have expected there to be an immediate change to the variable rate and probably also to the shorter term fixed rates.

As always, there has been a fly in the ointment and that is the concern about offshore markets/economies, especially in Europe. Sharemarkets continue to fluctuate wildly, the direction being dependent on the tenor of the news of the day - huge losses followed by gradual recoveries and that will probably be the nature of the beast for some time yet.

What is the main driver of interest rates in NZ? Well, the key concern and function of the Reserve Bank in NZ is the implementation of monetary policy with the primary focus being on keeping inflation (exclusive of one-offs such as the GST increase in October) within a band, currently set at between one per cent and three per cent. Inflation within that band is considered an indicator of a healthy economy which is showing sustainable growth.

Therefore, as our economy recovers, inflationary pressures build and can eventually push through the acceptable band noted above and that is where NZ's economy is headed at present.

It does seem more and more likely that negative offshore developments may at least slow down the increasing interest rate cycle and if that is correct then there is a case for having a portion of your debt on the variable rate if that rate is going to be slow coming off its historical lows.

Interest rates are still likely to peak at around the end of 2011 and into early 2012, but if that pans out we don't know how long they will stay elevated at that time before the Reserve Bank needs to start stimulating the economy again by reducing the OCR and hence interest rates. If people are currently fixing for a maximum of 18 months or two years, they must prepare themselves for a period on far higher rates to where they are now, but hopefully with some comfort that rates may start decreasing again not too long after that.

I find that most people desire the comfort of having a reasonable amount of certainty and are 'happy' to lock into a slightly higher rate for a reasonable period so that they don't have to constantly worry about what interest rates are doing.

In the last couple of weeks I have had several clients who have taken a mix of the variable rate and either an 18 month or two year fixed rate or a mix of the whole three. I quite like either strategy as that achieves a spread of risk and provides the opportunity to get some cash flow benefit if the increasing cycle is slower and/or shorter than expected, but provides protection if it is faster and perhaps a bit longer.