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.

Medium to longer term fixed rates have been reducing – so what's the story? Well, it's good for borrowers, but a sign that things aren't great both here and overseas.

The flow-on effect from the Reserve Bank's more negative comments that went with the announcement of the 0.25 per cent increase in the OCR (Official Cash Rate) on 29 July, was that the wholesale rates for the one year and longer terms had dropped and that, if they stayed at those levels, combined with more negative economic data offshore (especially the USA), then there could be a case for the medium to longer term fixed rates to fall here and that is how it is panning out at present.

In response to this the major banks have moved those rates down, albeit only by generally 0.1 per cent and whilst this is good for borrowers it does as noted above reflect a potentially worsening situation both here and overseas.

In NZ we are seeing weak economic data emerging and it actually ‘feels' worse than the data has suggested so far. Major bank economists are currently generally predicting that the Reserve Bank will still probably increase the OCR at the next opportunity on 16 September but pause twice after that in December and January. The market is still pricing in a 65 per cent chance of an increase on 16 September but I believe that there will not be an increase.

My reasoning is that we have low or reducing activity in the domestic, retail, small/medium business and housing sectors, worsening employment figures, a high NZ dollar, low net migration and significantly lower dairy prices. Added to that we have the GST increase in October and whilst that is offset to a degree by lower tax rates, the cost to the household is likely to exceed the benefits. All-in-all, the pressure is currently coming off inflation.

The Reserve Bank has the ability to ignore the impact of ‘one-off' occurrences (such as the increase in GST) in its assessment of whether inflation will stay within the guideline 1-3 per cent, there will be less pressure on the Reserve Bank to increase the OCR. Whilst there is a danger in not increasing the OCR quickly enough, there is also perhaps currently a greater danger that a further increase will cut any recovery off at the knees.

Also, with a lot more borrowers having a greater exposure to the variable and short term (6 month) fixed rates, with the increase in the OCR feeding through to those rates borrowers are already feeling the effect of higher rates, especially when there is a reluctance to lock into far higher fixed rates for 18 month plus terms.

So, what is a valid interest rate strategy at present? Well, it looks like the increasing interest rate cycle is going to take a lot longer and will probably have a lower high point than previously thought. That combined with slight downward pressure on the medium to longer rates suggests that there is no hurry to fix at the moment. Some borrowers may still desire certainty and the 18 month and two year rates look reasonable ‘buying' at present once the current round of decreases is in place for all lenders/banks.