Smart money goes on later cash rate rise

Over the past week, the wholesale market has shown slight increases in rates but these may not  last and have been insufficient to influence retail/home loan mortgages.
Tomorrow  the Reserve Bank reviews its Official Cash Rate (OCR) and the market is expecting no change to the existing 2.5 per cent rate, preferring to focus on the June 10 or July 29 review dates.
Why no change? Well, the bank indicated a start to the increasing cycle about the middle of the year, and an April 29 date appears to fall outside  that period.
Added to that was last week's announcement of a lower than expected quarterly inflation figure. That suggested household budgets were still under stress and there was no immediate pressure for the bank to start increasing interest rates.
Interestingly, in the last couple of days Australia announced that interest rates across the ditch were now at 10 to 12-year average levels and that may mean a pause in their increasing cycle.
That has already pushed wholesale rates down slightly in Australia and it will help  take external pressure off our rates in New Zealand.
Mind you, as signs of recovery strengthen overseas, other countries will start pushing up interest rates to dampen inflationary pressures, and that will put upward pressure on our fixed rates.
Presuming the OCR is not unexpectedly increased tomorrow, the debate centres on whether the rate will be increased on June 10 or July 29.
One of the bank economists who has been promoting a June 10 start date is now favouring July 29 and another one who had been picking July 29 (or later) has moved to the June 10 start date.
Those favouring a July 29 start date do so because they believe the economic recovery is not fully bedded in and increasing the interest rate cycle too early could put that recovery at risk.
While lower than expected, the 0.4 per cent quarterly inflation figure was, while  lower than expected, still above the Reserve Bank's forecast rate of 0.3 per cent, and therefore an OCR increase on June 10 is still on the cards - remembering that starting too late can be just as damaging as starting too early.
As a borrower what should you do? Well, no guarantees are on offer here, but it still appears that taking the variable rate in the short term (next month) is a viable option.
But you should, if you want certainty, be prepared to fix all or a substantial part of your loan exposure at reasonably short notice if the increasing cycle start date looks likely to be June 10.
Tomorrow, we may get some guidance from the Reserve Bank  on what the triggers will be for the increasing cycle.
On the other hand, the bank may not change its stance at all and the only guidance offered will be "around the middle of the year".
Brian Berry is a director of Rothbury Financial Services, based in Tauranga. He can be contacted on: phone 0800 33 34 35, fax 07-5790666 or email him at brian@rothbury.net.nz