There has been quite a lot of noise about (rising) inflation since roughly the end of March. It’s the kind of noise that borrowers and wannabe borrowers should keep an eye on. Why’s that you ask?

Because there’s a clear relationship between inflation and interest rates – when inflation changes, interest rates generally go the same way.

Right now the economy is marked with a handful of positives all of which add up to an increasing amount of fuel in the economic tank – that’s the result of more relaxed lending criteria and low interest rates, higher commodity prices and the best terms of trade in decades as well as improving consumer confidence. Lets not forget the wall of money arriving in the form of insurance payouts to rebuild Christchurch or the spend up RWC visitors will do either.

You would think that more fuel in the tank is a fantastic problem to have especially against the background of recession over the last few years. And it is a good problem to have but it needs to be balanced because the inflation created could be damaging. Which is where the Reserve Bank comes in – their job is to keep inflation in check and they do it by adjusting interest rates.

We’ve been saying for some time now that interest rates are likely to go up, it was just a case of when and our reasoning was purely to do with inflation expectations. In fact, were it not for the devastation in Christchurch rates may well have gone up already.

There is probably no more than 6 months of these lovely low floating rates left and our current thinking is that you should have locked in a long term fixed rate by Christmas, perhaps earlier. Many of our clients have taken the opportunity to do that already and while they might be paying a little bit more now they should be relatively better off next year. Even if that doesn’t pan out, they’ve had the benefit of absolute certainty around what their repayments will be for the duration of the fixed term which is good peace of mind.

It’ll be interesting to read the Reserve Bank’s policy statement due out tomorrow for a bit more information.




About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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