I can almost hear all those people sitting on floating or short-term mortgage rates breathing a sigh of relief after today’s official cash rate (OCR) announcement.

The governor of the Reserve Bank, Alan Bollard, decided to leave the OCR unchanged at 2.50% and more importantly he reiterated his line – the line the markets don’t believe – that OCR increases are not likely until the end of next year.

Yes that is sweet comfort in the short term, but the medium to long term looks increasingly unpleasant.

Two comments Bollard made today are well worth noting. One is that he has removed the possibility of further rate cuts. As readers will recall, in his previous statement he made the enticing comment rates could yet be cut further.

If you had that in your planning take it out now – it isn’t going to happen.

The second comment he made is don’t assume these interest rates will stay at these levels forever.

When they rise they will rise quickly and steeply. This is shown in some of the graphs accompanying today’s monetary policy statement.

Also, one of the economists had this to say: “Once the bank is convinced the time is ripe, sizeable interest rate movements can be expected.”

The view developing is that once the central bank starts tightening, it will endeavour to get the cash rate back up to “neutral” as soon as possible.

Accordingly, the Bank’s 90-day bank bill rate track goes from 2.90% in December 2010 to 5% by March 2012.

While this increase may seem scary, when it happens neutral is somewhere around historical averages, not up around 9% or 10%.

What does this mean for borrowers? The key point is that you will need to consider your strategy over the medium to long term and decide who you will manage your interest rates and cost.

Right now this is an opportune time to be using some of the savings from reduced interest payments to reduce your principal. But I suspect not many people are actually doing that.

One thing you must be aware of is being enticed into sweetheart floating rates. Over the years (although not recently) we have seen lenders offering sweetheart “introductory” deals for shorter duration terms.

There is talk that these sorts of lending products will come back into the market.

Like all good things these terms don’t last forever and at some stage you will probably have to roll onto what I call more standard rates.

One thing I think will happen is that there will be a bit of a campaign amongst banks to get your business as we move into spring more fully. However, it won’t be any of these deals where you can win a house or overseas travel or the like.

It will be around rate and shorter-term rates will come down. In the past week ASB has put out an historically low floating rate of 5.75% and this morning TSB Bank dropped its six-month fixed home loan rate from 5.50% to 5.35%. That makes it the lowest rate for this term, just pipping HSBC and Westpac which both sit at 5.39%. The median big bank six month rate is 5.48%.

There will be a battle for business, but not all lenders are likely to play the game. More importantly the battle will shift away from medium fixed term rates (two years being the recent competitive zone) to floating and short-term rates.

Bollard will like that, as it will make the OCR a more effective tool in managing interest rates, compared to the time when the majority of home loans were fixed at two years and outside the direct influence of the OCR.

One of the great things about watching interest rates is the poker game that goes on between the central bank and markets from time to time.

Today’s official cash rate announcement is one of those games.

Everyone agrees we are somewhere near the bottom of this part of the economic cycle, therefore the new question becomes when are things going to turn and when will rates start to rise again?

Following the previous OCR announcement we have seen tentative signs of a very modest recovery; this positive news sent all the economists rushing off to make new predictions about rate rises.

We have seen this through our Experts View section where all sorts of scenarios are developed and argued. Few, in fact only one, argued for further cuts.

It seems to be the role of the wholesale financial markets to anticipate Reserve Bank governor Alan Bollard’s next move.

Most had decided he was done cutting the OCR, so their next question was when is he going to start hiking?

Today’s statement illustrates how they have a built-in tendency to get ahead of themselves.

Bollard made it very clear today that he views the signs of recovery as patchy at best and any recovery was weak.

He then went onto say that there may be scope for further easing – so perhaps we are not quite at the end of this part of the cycle yet.

What does this mean for borrowers? Well, the basic message is that continuing to use a short-term fixed rate strategy will still work.

This paragraph in the statement is arguably the most crucial for borrowers:

“We consider it appropriate to continue to provide substantial monetary policy stimulus to the economy. The OCR could still move modestly lower over the coming quarters. We continue to expect to keep the OCR at or below the current level through until the latter part of 2010.”

There is always the caveat things may change, but at the moment the risk to the short-term fixing strategy is low.

Attention will now turn to the wholesale markets. We have seen swap rates creep up slightly as the market got ahead of itself in anticipating rate rises. However, they have come back five to10 basis points after the announcement.

I would expect these rates to ease back some more and it is conceivable home loan rates could fall marginally on today’s news…

If they don’t fall, one thing is for sure; the Reserve Bank has put a cap on any immediate home loan rate increases.

Should there or shouldn’t there be an enquiry into bank interest rates and their margins?

It’s the hot new question and a great lightening rod for passionate debate.

The left-leaning parties in Parliament have announced they will hold an “unofficial” enquiry into banks and the rates they charge, however those on the right are suddenly totally opposed to the idea.

Normally one would come to a conclusion that this “unofficial” enquiry is just a political stunt. Certainly some commentators are taking that view.

While it may be a stunt, it’s worth noting the positioning of key stakeholders.

First up the government seemed vaguely interested in such an enquiry. Then it put the kybosh on it big time. Some reports say Finance Minister Bill English told his people on the Finance and Expenditure Select Committee any enquiry wasn’t going to happen and they were to opposed it – which is what they did.

However, some of the government’s key supporters such as Federated Farmers seem pretty keen on the idea.

Likewise, the big-Australian owned banks have sat on the fence. None have said they won’t take part. (No doubt they aren’t that keen on the idea, but that’s another story).

And it seems the Reserve Bank governor Alan Bollard is mildly receptive. In the central bank’s report on bank margins it suggests short-term rates were too high and it seemed to indicate it was happy with some sort of examination.

I always felt it was putting some pressure on the government. Apparently Bollard has been invited to this “unofficial” enquiry, but he needs English’s permission to take part.

Perhaps this is clever politics and forcing English to say no.

No doubt the public will support the idea of an enquiry too.

This all leads to the observation while an enquiry may not amount to much, the government is well and truly on the wrong side of the argument.

One of the most common questions I get asked is where are interest rates going? People want to know where rates will be in a year’s time to help them make decisions on what to do now.

Unfortunately no one can answer that question. It’s a bit like saying asking what are you going to have for dinner on June 15, next year?

Rates can be highly unpredictable, especially in this period of time where there is much economic uncertainty.

A year ago no one expected interest rates to be as low as they are today; if they did then it would be hard to explain why all those people took out long-term loans.

If they knew where rates were going they wouldn’t have done that and we wouldn’t have had this huge amount of activity breaking fixed rates.

While we don’t know where rates are going we do a lot of work at mortgagerates.co.nz trying to get a handle on this question.

One of our regular surveys is of economists and their predictions about where interest rates will be in the future.

In the survey we ask the question about the OCR and the floating rate mainly as they are tied together, although Bank of New Zealand chief economist Tony Alexander argued otherwise recently.

The results of our most recent survey show a clear trend; but it also show that economists have some quite different views around timing.

The overall trend, and this shouldn’t come as a surprise, is that rates will stay low for until sometime in 2010, and then start to rise quite quickly.

Looking at the floating rate graph it shows that we may well see some more cuts to what is on offer.

The cuts are looking at coming in the next quarter or so which may tie in with any spring advertising campaigns from banks. From there we don’t see any movement until early to mid 2010. Then rates rise, and according to predictions, they may rise quickly and strongly.

Indeed there suggestions that floating rates could get up above the 8% mark within 12 months.

While that seems high, the floating rate has averaged a whopping 9.4% over the past five years – making 8% look nearly cheap!

So, according to the Reserve Bank, we poor borrowers who take out home loans on floating rates are being ripped off.

The central bank, in a paper this week, said the margins on floating rates are too high and they should come down. They are right on that point.

But the question is what can be done to get them down? Some suggest the government should use its bank, Kiwibank, to drive home loan rates lower.

It already has been doing this. Kiwibank had successfully been keeping the big banks honest and leading rates lower in the past. They became so good at it often it would announce rate changes straight after an OCR announcement.

We haven’t seen that competitive action this year, and there is good reason for it. It’s not to do with a lack of capital as some commentators argue.

Indeed its parent company NZ Post raised $200 million in a subordinated debt issue this year and half of that, under accounting rules, counts as capital.

Rather I would suggest the problem is around service. Our analysis of bank market share shows that Kiwibank has been boxing well above its weight and wrote the majority of the residential home loan business in the December quarter and also did very well in the three months to March 31.

Its mortgage book grew $603.5 million to $7 billion in the March quarter, accounting for 30.5% of all new mortgage lending by registered banks, while its market share at March 31 was just 4.67%.

In the December quarter, Kiwibank’s mortgage book grew $869 million and accounted for 89.7% of all new lending by registered banks, excluding the newly registered SBS Bank.

That’s a mighty achievement, plus a salient commentary of what other banks are doing – not lending.

Having watched lenders for many years it seems to me New Zealand organisations have never been the sharpest at pricing floating rates.

The Reserve Bank concludes in this report that margins on floating rates are too high.

So what? There doesn’t seem to be much point in using this rate at the moment. A far better option, if you want a short term rate, is to pick a six month term.

Westpac is offering six-months at 5.39% compared to its 6.49% floating rate, and Kiwibank is offering 5.45% v 5.99%.

The Westpac rate is fascinating as the spread, at 110 point is huge. I would also suggest that this is showing banks are mispricing floating rates. I can’t understand why there is such a big spread between the two rates – surely the cost of funding for the two isn’t that different?

You have to wonder if the banks are squirming over all this discussion and analysis over rates and margins.

Probably they are. But they may well decide to “tough it out” as the politicians and the regulators can’t make up their minds what to do, and in the end probably won’t do anything; and actually can’t do anything other than to regulate rates.

But what do you do? The answer is simple. Look at other options. There are locally-owned and funded institutions, like Kiwibank, TSB and PSIS, who offer better rates than the big Australian-owned banks.

*Philip Macalister is the publisher of mortgagerates.co.nz and the NZ Mortgage Magazine.