Interest rate cut seems good option

The Reserve Bank will tomorrow review the Official Cash Rate (OCR) and the financial market is unanimous there will be no change from the present level of 3 per cent.
It's interesting to note the focus is totally on whether the OCR will stay the same or go up and no consideration is given at all to a reduction in the rate.
I do not have the qualifications to analyse from a technical point-of-view, but I do have a reasonable feel for the micro-economy and what it's like at the coal face for borrowers, households and small businesses.
The Reserve Bank says it wants to keep interest rates at the present stimulatory level as it believes that inflation is not a problem and there is a greater need to kickstart the economy - remember in the last quarterly figures the economy went backwards by 0.2 per cent.
The bank also notes that the low OCR is, to its surprise, not providing the expected stimulus to get the economy firing.
The bank has been hoping for an export-led recovery and this is under way on the back of strong commodity prices but it is being held back by a NZ dollar that is at reasonably high levels.
There are several reasons for this - the high commodity prices and a weakness in other currencies - but a portion of this relates to the high interest rates and investment in New Zealand
What would be lost in dropping the OCR 2.5 per cent or even 2 per cent?
Forget fiddling with a 0.25 per cent drop because even at those lower levels our interest rates would still be comparatively high.
The bank has stated several times that the level of the OCR did provide scope to reduce rates if absolutely necessary. Has this time come?
Reducing the OCR by a decent amount in a shock move could well provide the stimulus to the economy we are all seeking.
With lower interest rates here, it may be viewed as being less attractive to invest in New Zealand and therefore the NZ dollar could well weaken. This would play into the hands of the desired export-led recovery - a great result.
Now, back to reality - or is it? What's a valid interest rate strategy at present?
The Reserve Bank has indicated it doesn't expect to start increasing the OCR until the September review, whereas the financial markets are pricing in July.
Regardless, it appears that the variable home loan rate is unlikely to increase soon, and most economists are saying that staying on the variable rate at present is the way to go.
Also, if the bank did follow my advice and actually drop the OCR, those on a variable rate would benefit - unlikely, so don't rely on that.
It appears New Zealand's recovery is going to be far more drawn out than hoped for and this is having a negative/holding influence on the medium to longer term fixed rates.
Conversely, in the US recent data has been relatively positive and rates have been easing up. If it continues, that will push up swap rates and possibly edge our fixed rates higher. The timing of any interest rate increases is really uncertain but still looks unlikely in the near future, so the variable rate option still looks reasonable.
It should be remembered that when the fixed rates do increase it should be in small increments, so all will not be lost if the first move is missed by the borrower.
Saying that, trading banks' advertised fixed rates are often only an indicator with discounts generally available - because of the competition and presumably reasonable margins.
If a fixed rate is being considered, I still favour the 2-year term providing a good mix of value and certainty for a reasonably sustained period, especially if a discount to the advertised rate can be secured.
As always, some will consider a mix of rates to provide a spread of risk - a reasonably valid strategy also.

Brian Berry is a director of Rothbury Financial Services, based in Tauranga. He can be contacted on: phone 0800 33 34 35, fax 07-5790666 or email: brian@rothbury.net.nz