Rate hike might be less painful

JUST when the financial markets seemed to be reasonably settled it all hit the fan again.
Markets lost faith in the ability of the Eurozone to sort out its problems, and suddenly world sharemarkets have been, at the time of writing, decimated with huge losses in value.
As always, there is some bounce-back happening, but it is all pretty fragile. This creates a few pressures on interest rates, in both directions.
If the world recovery is a lot slower or more rocky than expected, that affects the countries we trade with.
There may not be as much trade growth for our exporters and New Zealand's recovery will be slower. That potentially reduces the pressure on the Reserve Bank to increase our rates or to be less aggressive in doing so.
Interest rates will remain low for a lot longer in other countries as they continue to try  to stimulate their economies.
That increases the pressure to keep rates lower here, but there is another factor - the need for countries to borrow and fund their deficits (they need to spend more than they earn).
These borrowings are usually medium to longer term. If funds for that purpose are in relatively short supply worldwide, then the price to borrow (the interest rate) goes up and this affects our medium to longer term fixed rates.
Just over a week ago, it looked a certainty that the Official Cash Rate (OCR) would increase on June 10 as the New Zealand economic recovery was on track with Reserve Bank predictions.
These latest developments are a real fly-in-the-ointment and have created serious doubts for a June 10 start date to start increasing the OCR.
Saying that, inflationary pressures are building here and the Reserve Bank needs to make a call.
I believe the rocky world situation means that when the increasing cycle starts there may be pauses along the way as the Reserve Bank assesses the impact of a higher OCR.
The uncertain nature of world markets at present raises the same old question for borrowers - just how much certainty do you want when the main threat is for higher interest rates.
As borrowers, all we can look at is how exposed cash flow is to significant increases in interest rates - and whether we are prepared to take risks with that cash flow, or whether we want to know what our home loan payments are going to be for the foreseeable future.
If we fix rates now and rates stay low for longer than expected, then we will miss out on the cash-flow benefits of those lower rates.
But we may have been able to sleep at night and I guess that is the trade-off decision we have to make.
I have had several clients take a mix of rates recently - the mix being variable, 18-month and 2-year.
They therefore have a foot in either camp. They can accrue the cash-flow benefits on a portion of their debt through the variable rate if that rate takes longer to rise.
They can also enjoy certainty for a reasonable period, 18-month and 2-year terms, which still offer good discounts to their five-year averages.
The beauty of taking a spread of rates is that it spreads your risk, and the variable rate is easy to move out of if you lose the faith and want more certainty.
By taking a mix of the 18-month and 2-year terms, you are also not exposed to a single decision date on expiry of the fixed-rate terms.
As we have seen, a week is a long time for financial markets, and who knows what the coming week will bring.
We are getting close to June 10, and that date is still the likely start date for OCR increases. But offshore developments are putting that scenario at risk.
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.