Bollard's bite set to rival his bark

At the peak of the housing boom in mid-2007, Alan Bollard was tearing his hair out.

Every time he increased the official cash rate he had to wait for it to hit borrowers and slow their spending.

That was because so many borrowers were on fixed mortgage rates and the percentage of mortgages due to refinance within a year was just 38.2 per cent.

That meant many homeowners spent up large through mid- to late-2007 as Bollard hiked the OCR from 7.25 per cent to a record high 8.25 per cent.

The impact hit borrowers hard from mid-2008 onwards.

Monetary policy is difficult at the best of times. Some describe it as trying to drive a supertanker while looking through the rear vision mirror.

Not only are the ship's signs of progress (economic data) out of date as soon as they are seen on the bridge, but it can take years for the ship to turn after the captain moves the wheel.

Now Bollard's control of the ship is getting stronger and the wheel is more responsive.

Almost 61 per cent of borrowers are due to refinance within the next year and many are rolling off fixed mortgages on to cheaper but more volatile floating rates.

By the time he starts lifting the OCR from its record low of 2.5 per cent next year, his monetary policy potency will be even stronger.

The proportion of mortgages due to refinance within a year is likely to be close to 65 per cent by early next year. This raises interesting questions for Bollard.

By next year his ability to turn the ship on a dime will be enhanced. Does that mean he can wait longer before turning the wheel? Economists at ANZ National say this increased power may be a factor in Bollard's decision to hold off hiking rates until the second half of 2010.

Bollard should not be surprised that the longer he waits to turn the wheel, the harder he may have to turn it to avoid the reef of higher inflation.

That is bad news for homeowners, who may face a rapid hike in rates next year and in 2011.

It's an incentive for mortgage fixers to think twice before they opt for the apparently cheaper option of a variable or 6-month mortgage now.