Tony Alexander

Economic Commentaries

Weekly Overview for July 21

Thursday July 21st 2011

The Kiwi dollar is rising and two months from now we expect the Reserve Bank’s official cash rate will be going in the same direction. That means time is now up for floating rate borrowers who have been biding their time before fixing.

The June quarter annual inflation outcome of 5.3% was above expectations and therefore has left less scope for the Reserve Bank to keep the cash rate very low at 2.5% waiting to see how things pan out. In fact, in light of the stronger than expected March and December quarter economic growth numbers plus the fact the RB cut the rate 0.5% because of worries about the earthquake which have not necessarily come to fruition, we now think they will restart the monetary policy tightening cycle in September. We expect 0.25% rises in the official cash rate in September, October, December, then maybe a pause for a few months to gauge the impact.

What this means for borrowers is that time has now run out for comfortably sitting floating planning to fix before fixed rates rise. Such rises are probably only just around the corner with some bank fixed borrowing costs up 0.3% from just a fortnight ago. If I were a borrower and I have been planning to fix then I would see high risk in waiting any longer. Note though that we expect most borrowers will stay floating because unlike the situation in March 2009, to fix now one must pay more than floating. Back then people moved from floating to record low fixed rates lower than floating rates.

In other news this week the Kiwi dollar has risen to new post-float highs against the greenback and British pound. Further gains are likely in coming months – assuming the still poor situations regarding government debt in Europe and the United States soon turn for the better. If they don’t then all bets are off the table once again.