Column: Home loan rates look set to stay low

The focus recently has been on the Reserve Bank's review of the official cash rate, which remains unchanged at 2.5 per cent.
The official cash rate (OCR) is the Reserve Bank's main tool for controlling activity in the economy and, hence, inflation. If interest rates are low it encourages economic activity and vice versa. At present, economic activity in New Zealand is still very much in slow recovery mode and a slightly weaker-than-expected Consumer Price Index confirms inflationary pressures are still not strong enough to warrant any action
by the Reserve Bank.
When assessing inflationary pressures, the bank needs to distinguish between one-off influences - such as the GST rise, cost-plus influences - such as fuel costs driven by offshore pricing, and what is actually being driven by economic activity.  People are earning more and spending more, so demand increases, prices go up.
Some positive growth is good for an economy and inflation is a natural result of that. Inflation of between 1 per cent and 3 per cent a year is considered an acceptable level and is the band that the Reserve Bank is charged with achieving, allowing for the one-off influences and other extraordinary circumstances, such as the global financial crisis and the Christchurch Earthquake.
If the Reserve Bank gets it right, it allows economic activity to reach a sustainable, positive level within the inflationary band and everyone does quite nicely. If the Reserve Bank gets it wrong and moves too early, any recovery may be brought to its knees.
It is, therefore, understandable that the Reserve Bank continues to sing the same tune:  Watch and wait.
This means the variable home loan rate will stay low for several months.
With about 75 per cent of the borrowing market sitting on variable or fixed rates of one year or shorter, the Reserve Bank will get a lot of bang for its buck when it does increase the rate, as borrowers' pockets will be affected almost immediately. It can afford to wait a bit longer before increasing the rate.
This differs from the downward leg of the current cycle, when stimulus was needed. Most borrowers were on fixed rates and the benefit of lower, short-term rates took a long time to feed through to economic activity.
As has been noted,  the position with the medium-term fixed rates is less clear, but we can expect those rates to start increasing well before the variable/short-term rates do. The influences are both from offshore, largely what United States' rates do, and onshore,  what wholesale and deposit rates do here.
While the place to be still appears to be the variable rate, I see no benefit in fixing a rate for less than two years, as those rates will mature at the wrong time, if fixing is going to be considered later.
I am comfortable with borrowers taking a two-year, fixed rate, either now or in the next few months. I believe that will deliver a good combination of certainty and a reasonable rate for a proportion of their overall exposure.
Brian Berry is a mortgage adviser with Rothbury Financial Services Rotorua