Rates one big game of poker

One of the great things about watching interest rates is the poker game that goes on between the central bank and markets from time to time.

Yesterday’s official cash rate announcement was one of those games.

Everyone agrees we are somewhere near the bottom of this part of the economic cycle, therefore the new question becomes when are things going to turn and when will rates start to rise again?

Following the previous OCR announcement we have seen tentative signs of a very modest recovery; this positive news sent all the economists rushing off to make new predictions about rate rises.

We have seen this through our Experts’ Views on www.mortgagerates.co.nz section where all sorts of scenarios are developed and argued. Few, in fact only one, argued for further cuts.

It seems to be the role of the wholesale financial markets to anticipate Reserve Bank governor Alan Bollard's next move.

Most had decided he was done cutting the OCR, so their next question was when is he going to start hiking?

Yesterday’s statement illustrates how they have a built-in tendency to get ahead of themselves.

Bollard made it very clear yesterday that he views the signs of recovery as patchy at best and any recovery was weak.

He then went onto say that there may be scope for further easing – so perhaps we are not quite at the end of this part of the cycle yet.

What does this mean for borrowers? Well, the basic message is that continuing to use a short-term fixed rate strategy will still work.

This paragraph in the statement is arguably the most crucial for borrowers:

"We consider it appropriate to continue to provide substantial monetary policy stimulus to the economy. The OCR could still move modestly lower over the coming quarters. We continue to expect to keep the OCR at or below the current level through until the latter part of 2010."

There is always the caveat things may change, but at the moment the risk to the short-term fixing strategy is low.

Attention will now turn to the wholesale markets. We have seen swap rates creep up slightly as the market got ahead of itself in anticipating rate rises. However, they have come back five to10 basis points after the announcement.

I would expect these rates to ease back some more and it is conceivable home loan rates could fall marginally on yesterday’s news...

If they don't fall, one thing is for sure; the Reserve Bank has put a cap on any immediate home loan rate increases.