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.
Looking shorter term, BNZ and other forecasters are predicting the Official Cash Rate (OCR) to be near 6% by late-2011. Alexander adds that over the past 10 years the average floating mortgage rate in NZ has been 8.5%, or 9.3% over five years.
"Hence our warning that come late-2011 when the OCR is returned to somewhere near a normal 6%, floating rates will also go back to something close to a normal 8.5%."
