Think about fixing at a two-year rate soon

Borrowers could think opportunistically about hopping into, at the longest, a two-year rate in the next two or three months just ahead of the Reserve Bank tightening monetary policy, says BNZ economist Tony Alexander.

Friday, April 16th 2010, 12:57PM

by Jenha White

In the BNZ Weekly Overview he says some of the longer-term fixed rates have been cut in recent weeks, but this is of little importance because few people are borrowing for fixed periods beyond two years.

Alexander says he would not contemplate grabbing a nice low fixed rate for terms three years and beyond until this interest rate cycle has peaked then bottomed out again some year down the track from now.

"If I were borrowing at the moment I would still be floating and paying down debt as much as possible."

BNZ believes the Reserve Bank still looks to be on track to start taking away the stimulatory monetary policy setting of a 2.5% cash rate come June, though there is a risk they might wait a tad if data releases come in weaker than expected before then.

Alexander says it is important to remember that the Reserve Bank will not have a target level for the cash rate in mind which they plan getting to in a rigid manner.

"Both here and overseas interest rates will be raised taking into account how the economy reacts along the way. If necessary rate rises will be slowed or hastened depending upon how we react."

He says at this stage one would have to say that if recent data is anything to go by we will not react well. Businesses are aggressively paying down debt while households are barely growing their debt levels at all.

He says given that rising interest rates are intended to retard borrowing and spending one imagines that at some stage, either late this year, or next year the Reserve Bank will feel it is a good idea to pause in their tightening cycle to see how the economy is getting along.

"That uncertainty means people need to be wary of interest rate predictions for the next couple of years and especially wary of fancy borrowing strategies dependent upon rates being at certain levels at certain times."

BNZ believes for the moment, given the uncertainty, that most borrowers will remain well served by floating the bulk of their debt and budgeting for that floating rate cost rising 3% between the middle of this year and the end of 2011.

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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