Official Cash Rate remains at 2.5% - what does that mean for borrowers?

Official Cash Rate remains at 2.5% - what does that mean for borrowers?

It has been speculated that we will see some increase in the cash rate before the end of this year, some predicting as early as September. Mr Bollard confirmed that the economy is growing more rapidly than previously expected but he also expressed concern about the ongoing fragility of global financial markets and in particular uncertainty around the US Government’s debt ceiling.

While local inflation is higher than the Bank’s 1 to 3 percent target band much of this spike has been caused by last year’s increase in GST and the impact should therefore be temporary. Mr Bollard did comment however that provided the current global financial risks recede and the economy continues to recover he sees little need for the cuts made to the cash rate in March 2011 to remain in place for much longer.

So what does all this mean?
I think it confirms that we may see some increase to the cash rate by the end of the year, perhaps by as much as half a percent. I also think that increases to the cash rate, which will flow onto interest rates, are likely to be gradual, and therefore interest rates will likely rise slowly.

Fixed Interest Rates:
The window of opportunity to fix at current levels is certainly getting smaller. You can split your loan too which means put some on fixed and some on floating rate, this can help offset your risk a bit and not have all the eggs in one basket

While there are some very good shortish term fixed interest rates (say 2 years) available the problem may be when those rates roll over interest rates could be close to their peak again and that will make the next decision difficult to make.

Floating Interest Rates:
These remain at low levels although we should expect them to rise before the end of the year. It is impossible to predict what rates will go to but my best guess suggests they will rise by at least .50% by the end of the year. We are expecting the floating rate to remain at competitive levels however for some time to come yet.