YOUR MORTGAGE: Time on your side to chose best option

Major banks are starting to move interest rates downIN LAST week's column I noted 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 1 year and longer terms had dropped.
 If they stayed at those levels, combined with more negative economic data offshore (especially the US), 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.
At the time of writing the major banks are starting to move those rates down, albeit only by generally 0.10 per cent and while this is good for borrowers it does reflect a potentially worsening situation here and overseas. By that I mean the economic recoveries are not as strong as had been hoped.
Here 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 the Reserve Bank will still probably increase the OCR at the next opportunity on September 16 but pause twice after that in December and January. The market is still pricing in a 65 per cent chance of an increase on September 16 but I believe there will not be an increase.
My reasoning is we have low or reducing activity in the domestic, retail, small/medium business and housing sectors, worsening employment figures, a high NZ dollar and significantly lower dairy prices. Added to that we have the GST increase in October and while that is offset to a degree by lower tax rates the cost to the household is likely to exceed the benefits. Given the above is less inflationary and 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 per cent to 3 per cent, there will be less pressure on the Reserve Bank to increase the OCR.
While there is a danger in not increasing the OCR quickly enough, there is also perhaps currently a greater danger 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 (six 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 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.
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