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06-05-2010

Procrastinate while one has the chance

Landlords.co.nz

If monetary policy tightening starts in June as BNZ still expects, then for those planning to have a mortgage exposure for three years there is a forecast benefit near 0.5% for fixing three years rather than floating, says BNZ economist Tony Alexander.

By Jenha White

This benefit shrinks for the one and two-year terms and if monetary policy tightening is delayed until September, it clearly pays to stay floating at the moment, he says in the BNZ Weekly Overview.

"So why would I not fix three years given my expectation of having a mortgage for a period of time longer than that and vague expectation that really low fixed rates don't come back until about 2013?"

Alexander does not think the one to three-year fixed rates are on the verge of being raised, therefore borrowers can continue to enjoy the low floating rate for longer while keeping repayments at a very high level.

"I can then get down to the serious business of thinking about fixing a few weeks from now whereas at the moment it is more of a task one can put off for a bit longer.

"Procrastinate while one has the chance!"

Alexander also talks about the Official Cash Rate (OCR) which as had been universally expected was kept at 2.5% last week - the rate the Reserve Bank took it to a year ago when worries were high regarding the world economy and its effect on a NZ economy still at the time believed to be in recession.

"Actually in the June quarter of last year we came out of recession, but the Reserve Bank has kept the cash rate low because lots of spare resources were thrown up by the recession and because of ongoing worries about credit availability during and following the greatest global financial shock since the 1930s."

He says those latter worries are now much less than they were before though lending standards are tighter globally than in the past and banks - while able to comfortably raise funds offshore - have to pay more for it than in the past and target more long term funding under altered Reserve Bank rules.

The Reserve Bank did however alter its comment that it expects to raise the rate around the "middle of the year".

It is now "...we expect to begin removing policy stimulus over the coming months..."

Alexander says this is a slight weakening which increases the chances that the first rate rise is delayed but still leaves open the strong possibility that tightening starts in early June.

After all, just this week we have seen good news in the form of the very strong NBNZ survey plus Fonterra lifting their forecast payout by 40 cents to $6.10.

"In fact we still at a pinch expect a June 10 start," says Alexander.

Source: Landlords.co.nz

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