Brian Berry: Home loan rates set to hold steady in wake of Budget

Last week, all eyes were focused on the release of the 2011 Budget.
It has been interesting to note that the Government had already intentionally signalled that the Budget would have to be neutral, meaning extra spending in one area would need to be offset by reduced spending in other areas.
This was politically clever, spreading the "damage" across a two to three-week period and allowing markets to slowly get comfortable with what the Budget was likely to deliver. Reactions to the eventual announcement would, therefore, be minimal.
As in many countries, economic performance during the last couple of years has been especially disappointing, with recoveries stalled or struggling to gain momentum. International financial markets are all about risk versus return and one of the major methods of assessing risk is reports by international rating agencies.
These agencies are pretty powerful as the lower the country's credit rating, the higher the cost of borrowing. Rating agencies are watching New Zealand very carefully and that is why this Budget was so important.
If the Government is not seen to be putting a lid on spending, with a clear path to generating budget surpluses, a rating downgrade could occur. That looks unlikely at the moment.
New Zealand's position as a destination for international investor funds is viewed as being pretty sound at present, as investors look to diversify their investments to spread their risk.
We are politically stable, are showing gradual signs of recovery and have comparatively low, but high, interest rates. This is why there has recently been high demand for Government Bond issues and the Government has been able to pay less to investors, taking the pressure off longer-term rates.
Internationally, markets are currently dominated by global growth concerns and the continued government debt crisis in several European countries. The United States is a major driver of markets globally and also has a strong influence on our medium to longer-term interest rates here. In the US, the Federal Reserve has noted that monetary policy will remain stimulatory for some time and so, as in New Zealand, concerns about growth are dominating any concerns about inflation.
On the interest rate front, we can, therefore, reasonably expect home loan rates across all terms to stick around current levels for quite some time, meaning taking advantage of very low variable rates appears to be "the place to be" for the foreseeable future.
Whether the cash flow savings are used for mere survival, the reduction of debt or saving depends on the individual borrower's circumstances, but it is important the benefit of these low rates is not wasted. The tide will turn at some stage and it is prudent to be in the best position possible going into the next increasing interest rate cycle.
- Brian Berry is a mortgage adviser with Rothbury Financial Services Rotorua