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MR - Experts Views

Forecasting interest rates highly uncertain exercise

Thursday 17th of September 2009

In this week's BNZ Weekly Overview, Alexander says that looking this far out as we exit the most uncertain economic times seen around the planet in decades, means it is impossible to reasonably pick what monetary policy will "need to be doing" over 2012-2014. That creates a forecasting problem for picking fixed rates over 2011.

"If we can't even seriously guess how much the cash rate will rise over 2012-2014 then we cannot really generate a believable forecast for where fixed interest rates will be," he says.

Taking a punt, Alexander suggests fixed rates come late 2011 would be higher than they are now by at least 1% for terms of three years and beyond, but warns he has no serious analysis to back that up.

As a result he prefers a borrowing strategy of having a portion of debt fixed, while capitalising on the low interest rate environment with the rest floating to help reduce the debt burden.

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