LATEST thinking is the Reserve Bank will increase the official cash rate (OCR) when it presents its latest economic review tomorrow.
The New Zealand economic data, inflationary pressures and business confidence suggest that the rate should rise by 0.25 per cent - and the market has factored in a 80 per cent chance of this happening.
As always, there is a fly in the ointment - the concern about offshore markets/economies, especially in Europe.
As I write this column, the sharemarkets have reacted badly, yet again, to the weaker-than-expected payrolls data in the United States.
Then again, the sharemarkets could have bounced back within a day - such is the roller-coaster ride.
It is interesting to note that Australia has taken a pause with increasing its official interest rate on the back of weaker economic data and offshore risk.
Australia is, of course, well into their economic recovery and tightening cycle, so it is not surprising that they have taken the opportunity to assess the result of the interest rate increases put in place so far.
The Reserve Bank has also been keeping a close eye on Canada as its economy is in a similar position to our's.
The Canadians increased their equivalent of the OCR last week, noting that they will keep a close eye on offshore developments. That may well be the stance our Reserve Bank takes tomorrow.
Any changes the Reserve Bank implements affects inflation by as much as two years down the track.
The good thing is that the recovery is now export-led which is preferable to a consumer-spending recovery.
However, because of the uncertainties offshore there could still be a negative effect on commodity demand and prices and, therefore, the Reserve Bank may have to slow down the tightening cycle.
If that eventuates, then there is a case for having a portion of your debt on the variable rate - assuming the rate is going to be slow coming off its historical lows.
Interest rates are still likely to peak at the end of 2011 and into early 2012, but we don't know how long they will stay at those levels.
If people are currently fixing for a maximum of 18 months or two years, they must prepare themselves for a period of being on higher rates. But, hopefully, not for too long.
There is so much uncertainty at the moment and interest-rate decisions should really be about looking at your specific circumstances and deciding how much risk you want to take and/or how much certainty you want or need.
I find that most people like the comfort of having a reasonable amount of certainty and are happy to lock into a slightly higher rate for a reasonable period.
In the past couple of weeks, I have had several clients who have taken a mix of the variable rate and either an 18-month or 2-year fixed rate - or a mix of the whole three.
I like either strategy as that achieves a spread of risk and provides the opportunity to get some cash-flow benefit if the increasing cycle is slower and/or shorter than expected.
It also provides protection if interest rate rises are faster and perhaps stay up a bit longer.
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
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