The Reserve Bank of New Zealand has held the Official Cash Rate (OCR) at 2.5% as expected, but has dropped any suggestion of hiking the OCR any time soon.
Governor Alan Bollard has warned the European financial crisis has worsened the economic outlook and reduced the pressure on inflation, leaving him more room to hold the OCR at what were once ‘emergency’ record lows for some time.
The Reserve Bank (RBNZ) also lowered its forecast track for the 90 day bill rate, which is a wholesale interest rate that usually sits about 0.2% above the OCR. The bank now sees it rising through the second half of 2012 and into 2013 to around 4%, which implies a peak for the OCR at around 3.75% by the end of 2013.
However, most economists expect the RBNZ to hold the OCR through until the end of 2012 and say there is an increased risk of a cut in the OCR if the European financial crisis deepens.
The Reserve Bank also commented that the international funding costs for banks was increasing and may cause them to pass on those costs in the form of higher mortgage rates.
Bollard said he would not necessarily cut the OCR to offset any increase in retail mortgage rates, but he said it would be something the RBNZ would take into account.
All this means the outlook for interest rates is they stay lower for longer, although there is a slight risk they may rise a little even if the OCR is held steady.
Floating mortgage rates are advertised at around 5.7%, which makes them cheaper than most fixed rates.
My view is that interest rates will stay lower for longer and may even be cut if the European financial crisis worsens significantly, which is possible given the political and financial pressures building inside Europe’s banking system.
That would make floating a better bet than fixing, but this depends on your interest rate view and your personal circumstances.