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 I write this blog (Wed 30 June), world sharemarkets are yet again on a downhill slide in response to news that China may be slowing faster than thought and also as concerns still exist in the Eurozone, especially for the banking industry's exposure to the problems there.

Talk about a rollercoaster ride! On the back of that, world interest rates remain relatively soft as it appears that interest rates in Europe and the USA may need to be kept low for longer and this is helping to keep the heat out of our wholesale interest rate market.

As several economists are now saying, to expect the world economy to smoothly move out of a major recession caused by financial issues in a short time is relatively unrealistic and it is not surprising that it is a rough ride along the way.

The action in the interest rate market in NZ since the OCR (Official Cash Rate) was reviewed on 10 June has centred mainly on the short term home loan rates - the variable out to 12 month fixed rates. This has resulted in what is called a flattening of the yield curve as the short term rates have been driven up by the OCR (Official Cash Rate), whereas the longer term rates have eased marginally (at the wholesale market end at this stage) due to the weakness in the major European and USA markets, where rates are likely to be held down for quite a bit longer.

Unless the situation in world markets implodes, the current expectation is that the Reserve Bank will again increase the OCR on July 29 and probably again on September 16, but we may well see a pause after that to assess the effect of the increases thus far, especially if there continues to be negative offshore developments.

In general terms, NZ appears to be far better placed for a sustained recovery than most countries and at this stage the trend is definitely up and mainly being driven in the background by strong demand for our key export commodities from Asia.

As is noted above, there are a lot of influences at play and they are not necessarily tugging rates in the same direction. The short term rates are almost directly affected by changes in the OCR, whereas the medium to longer term fixed rates are determined more by what happens overseas.

Therefore, with probably two 0.25 per cent increases in the OCR over the next three months and then perhaps a pause, we can expect the variable rate to go up over that period by 0.50 per cent also. On the other hand increases in the medium to longer term fixed rates may be slower to eventuate.

All this uncertainty as to the amount of the increases and the timing of when those increases may come through over the next two years or so, means that taking a mix of interest rates is a reasonably valid strategy to follow - taking advantage of low short-end rates while still grabbing some certainty for a reasonable period for perhaps 18 months or two years (or a mix of those rates).

If you have committed to a strategy to follow the variable rate up for all or part of your debt then you should probably consider a fixed rate for one year instead of the variable rate as the variable rate is, in most cases only approximately 0.5 per cent below the one year fixed rate. Therefore, if that 0.5 per cent benefit is going to disappear by mid-September, with further increases expected, then the one year rate should provide a better overall cash benefit over the 12 month period.

At the end of that 12 month period, you will have a similar decision to make as you have now - rates will be higher and it is just whether you follow the variable rate up at that time or look at other relatively short term rates as a short term alternative.

As I have said ad infinitum, I favour a mix of rates to spread your cash flow risk and also your maturity risk when your rates expire.