Euro mess keeps fingers off the raise-rates button

A WEEK'S a long time in this game, especially when you have conflicting pressures that may affect interest rates.
The first one is the Reserve Bank of Australia's review of their official cash rate. The market is picking the rate will not be increased again and perhaps for some time as they are well into their increasing cycle and some economic data is not as strong as they'd like.
The second one is the review by the Canadian Central Bank. New Zealand has been keeping a close watch on Canada as they are in a similar position, regarding economic recovery and inflationary pressures.
The only thing holding them back from putting up their cash rate is consideration of the melt-down in Europe.
Similarly, in New Zealand it appears that the only likely reason to stop the Reserve Bank from increasing the Official Cash Rate (OCR) on June 10 is wanting to see the flow-on effects of the European situation.
Whilst New Zealand does have an export exposure to Europe, it is not too significant - and the most likely flow-on effect will be the influence on the cost and availability of medium to longer-term fixed rate borrowings.
An increase in the OCR on June 10 is considered very likely as inflationary pressures are building, business confidence has improved markedly, and export commodity prices are relatively strong (especially milk products, forestry and even meat).
The likelihood of a rate increase has seen the wholesale market, at the short end, move ahead.
The Reserve Bank will be mindful that it needs "lock the stable door before the horse bolts" and it may be comfortable throwing in an increase now and seeing what happens - rather than moving too late.
As borrowers, the advice really remains unchanged. All we can look at is how exposed our cash flow is to significant increases in interest rates.
Then consider whether we are prepared to take risks with that cash flow, or we want to know what our home-loan payments will be for the foreseeable future.
I quite like a mix of rates - variable, 18-month, and 2-year. That means you may accrue the cash-flow benefits on a portion of your debt (variable rate) if that rate takes longer to rise.
As well, you enjoy certainty for a reasonable period - the 18-month and 2-year terms still offer good discounts to their five-year averages.
While the 2-year is higher than the 18-month, I still quite like a higher weighting on the former rate. This will take you through to mid-2012, which is hopefully past the peak in the interest rate cycle.
If you are thinking of fixing, then I would probably be making that move sooner rather than later as you may miss out on rates at current levels.
 Brian Berry is a director of Rothbury Financial Services, based in Tauranga. Phone 0800 33 34 35, fax 07-5790666 or email brian@rothbury.net.nz.