Predicting the unpredictable

One of the most common questions I get asked is, where are interest rates going? People want to know where rates will be in a year’s time to help them make decisions on what to do now.

Unfortunately, no one can answer that question. It’s a bit like asking what you are going to have for dinner on June 15, next year.

Rates can be highly unpredictable, especially in this period of time where there is much economic uncertainty.

A year ago no one expected interest rates to be as low as they are today; if they did then it would be hard to explain why all these people took out long-term loans.

If they knew where rates were going they wouldn’t have done that and we wouldn’t have had this huge amount of activity in breaking fixed rates.

While we don’t know where rates are going we do a lot of work at mortgagerates.co.nz trying to get a handle on this question.

One of our regular surveys is of economists and their predictions about where interest rates will be in the future.

In the survey we ask the question about the OCR and the floating rate mainly as they are tied together, although the Bank of New Zealand chief economist argued otherwise recently.

The results of our most recent survey show a clear trend, but also show that economists have some quite different views around timing.

The overall trend, and this shouldn’t come as a surprise, is that rates will stay low until some time in 2010, and then start to rise quite quickly.

Looking at this floating rate graph, it shows that we may well see some more cuts to what is on offer.

The cuts are looking at coming in the next quarter or so which may tie in with any spring advertising campaigns from banks. From there we don’t see any movement until early to mid 2010. Then rates rise, and according to predictions, they may rise quickly and strongly.

Indeed there are suggestions that floating rates could get up above the 8% mark within 12 months.

While that seems high, the floating rate has averaged a whopping 9.4% over the past five years – making 8% look nearly cheap!