OCR uncertainty

With the economy's recovery being so weak and patchy and with major problems still in existence internationally, BNZ believes there's a risk that the Reserve Bank will not raise the cash rate as quickly as it has pencilled in.  

Friday, July 2nd 2010, 10:28AM

In the BNZ Weekly Overview, economist Tony Alexander says the monthly residential and non-residential building consent numbers were weak, the credit growth numbers remain poor, and business sentiment has pulled back which has fed through to some easing in employment and investment intentions.

"This is where we get our noted risk that the pace of New Zealand monetary policy tightening could turn out to be slightly slower than general expectations," says Alexander.

He also notes that forecasts internationally for long term interest rates are being pushed lower in response to reduced expectations that the Federal Reserve, the European Central Bank and the Bank of England will be able to start their monetary policy tightening phases anytime soon.

He says extra fiscal policy tightening in the EU and UK in particular takes some of the pressure off monetary policy - as does the concern about the debt situation and its impact on confidence. In the US however, worries are building about the state of the housing sector - at the same time as indicators for the manufacturing sector get better.

Alexander says this uncertainty risk offsets the current benefits for borrowers to fix and generates the coin toss scenario between floating or fixing.

"Personally, I'd at a pinch stay floating and go for the ride hoping that when the floating rates are at their peaks two to three years from now, I do not panic and lock in a fixed rate, which now I would not touch with a bargepole."

Alexander says if he were to not float, he would probably fix at 7.30% for two years.

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