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.

This week all eyes in New Zealand were on Thursday's (29 July) review of the OCR (Official Cash Rate) by the Reserve Bank. As expected the rate was reviewed up by 0.25 per cent, taking it to 3 per cent.

In its June Monetary Policy Statement, the RBNZ noted that they had "decided to begin removing some of the monetary policy stimulus that is currently in place. The further removal of stimulus will be reviewed in light of economic and financial market developments."

In this week's announcement the Reserve Bank perhaps surprisingly noted that 'the pace and extent of future OCR increases is likely to be more moderate than was projected in the June Statement." This was probably further than the market expected the Reserve Bank to go with its supporting statement and the market reaction was quite swift with wholesale rates falling slightly across most terms and the NZ dollar also falling slightly.

We all know that international markets have been all over the show depending on the sentiment of the day and as the US Federal Chairman Ben Bernanke said the other day "the economic outlook remains unusually uncertain".

With regard to the NZ economy, at the 'coal face' it feels that activity is very subdued and reducing rather than improving. Household budgets are under reasonable stress and that feeds through to reduced activity for retailers and small businesses. The housing market appears to have slowed further and the very low net migration figure (net migration being one of the major drivers of the housing market) will not assist that market at all.

With regard to our export-led recovery, the NZ dollar has strengthened considerably on the back of the weakness of the other currencies and also in anticipation of the interest rates increasing here (off-shore investors need to buy NZ dollars so that they can invest here) and on top of that, international milk product prices have dropped considerably.

This paints a reasonably gloomy picture but it was not enough for the Reserve Bank to not increase the OCR on Thursday - as the bank will want to see hard data (there is a reasonable time lag in obtaining this) so that they can make an informed decision, rather than one based on 'rumour and rhetoric'.

So, what effect will the increase in the OCR have on home loan rates? Well, we would expect it to increase the variable rate, but with so much uncertainty about the timing of near-future increases in the OCR it may not even have much effect on the shorter-term fixed rates and even less on the medium to longer term fixed rates.

The market has been pricing in three increases in the OCR (including the one on Thursday) before the end of the year, but I believe that economic data will probably necessitate a 'pause and assess' by the Reserve Bank (in September and possibly October), especially with GST increasing in October, which in itself is a form of tightening.

Medium to longer term swap rates remain down relative to where they were on the back of interest rates being expected to remain low overseas for some time (to stimulate recovery).

Therefore, as far as an interest rate strategy is concerned, while the variable rate may increase as a result of the OCR increase, there probably does not appear to be a need to rush in and fix rates at present (for the medium term), unless offshore rates increase which appears unlikely while the Eurozone economies struggle to recover and the recovery in the USA remains reasonably subdued.

You must temper that with the level of certainty you desire and obtaining a spread of risk via a mix of rates still appears to be a good option for most borrowers. I still favour a mix of rates that includes a short term rate (to take advantage of a slower than expected increasing cycle) and the 18 month and two year rates, but not beyond that.