The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.5 percent.
Reserve Bank Governor Alan Bollard said: “The economy has grown more strongly than was expected, and it appears that the recovery is getting back on track, supported by a strong terms of trade. At the same time, however, current fragility in global financial markets, including the uncertainty around the US Government’s debt ceiling, continues to highlight the downside risk to trading partner activity noted in the June Statement.
“Annual headline CPI inflation continues to be above the Bank’s 1 to 3 percent target band. However, much of the current spike in inflation has been driven by the October 2010 increase in the rate of GST, and will therefore be temporary. Wage and price setters should focus on underlying inflation, which is currently estimated to be below 2.5 percent.
“Provided current global financial risks recede and the economy continues to recover, the Bank sees little need for the March 2011 ‘insurance’ cut to remain in place much longer. The current very high value of the New Zealand dollar is acting as a drag on the New Zealand economy. If this persists, it is likely to reduce the need for further OCR increases in the short term.”
Should I fix or float?
As we have said previously floating your mortgage repayments currently represents the “cheapest” option for borrowers but we stress again that the fixed rates advertised today whilst you float may not be the rates you get from the bank when you do eventually fix.We suggest that new mortgages be placed on a floating rate until such time as inflationary pressures see the Reserve Bank remove monetary policy stimulus and home interest rates start to rise. Future increases to the OCR could well be aggressive to counter inflation (if the Reserve Bank does not act soon enough) but these should not occur this year. In saying that if we were to see a sudden spike in inflation the Reserve Bank WILL act sooner make no mistake about it. People that opt to fix their repayments at present will do so if they are either on a budget or want certainty long term. There is a lot to be said for the logic of this given how attractive some of the longer term fixed rates currently look. As always an individual’s personal circumstances dictate their decision whether they float or fix their mortgage with their bank. Just because your neighbour happens to be floating his/her mortgage at their bank doesn’t necessarily mean you should also. If interest rates increased in the coming years by 2% p.a. this would see an extra $500 per month added to the cost of an average mortgage of $350,000.
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