Opinion: Bernard Hickey looks at the options of fixing and floating ahead of the RBNZ's OCR decision

By Bernard Hickey

Those thinking of fixing or floating or buying or selling in the next 10 days should take a deep breath.

Banks jumped the gun last week by cutting their fixed mortgage rates in anticipation that the Reserve Bank of New Zealand would cut the Official Cash Rate by as much as 0.5% this coming Thursday.

ANZ moved first on Tuesday morning, cutting most of its fixed mortgage rates and those of its subsidiary National Bank. In particular, ANZ cut its one year mortgage rate by 0.5% to 5.95%, but left its floating mortgage rate unchanged at 6.20%. See Gareth Vaughan's article here on ANZ's first move.

This changed the rates landscape because this dragged ANZ's one year fixed rate below its floating rate for the first time since November 2009. It was followed by Thursday morning by all of the main banks. See our earlier article here on the banks responding.

They were responding to a fundamental shift in New Zealand's economic outlook and a slump in wholesale interest rates in the wake of Christchurch earthquake. Banks tend to fund their fixed mortgage rates from wholesale markets for money. These are known as 'swap' rates. The 1 year 'swap' rate fell from 3.37% the day before the earthquake to 2.92% on Friday. See our interactive chart below.

The wholesale markets moved in anticipation that the Reserve Bank would at least stop increasing interest rates through the rest of 2011, as it had indicated pre-quake, and might actually cut them on Thursday when it releases its March quarter monetary policy statement. Markets are now betting that a 0.25% cut is a sure thing and there's a better than 50% chance of a 0.5% cut.

This is slightly surprising given there remains significant uncertainty about a cut.

Economists from BNZ, NZIER and JP Morgan have said an interest rate cut may be a blunt instrument and targeted government spending would be the best way to boost the Christchurch economy.

Research on what the US Federal Reserve should have done after Hurricane Katrina found the Federal Reserve would have been better off raising interest rates to contain inflationary pressures, rather than cutting interest rates.

There are already reports of prices of petrol, construction goods and groceries rising in and around Christchurch. Commercial rents in some areas have doubled. The New Zealand dollar also fell to its lowest level since mid 1985 against the Australian dollar last week and is down to its lowest level in almost a year on a Trade Weighted Index basis. The currency weakness will increase the price of imported goods, adding to the inflationary impact of the oil price's surge through US$100 a barrel.

Wholesale interest rates could rebound in the coming weeks if they are disappointed by a Reserve Bank decision to leave rates on hold. That might make the low one year rate attractive in the short term. But should those who have chosen to float over the last year -- and most new borrowers have -- jump back into a fixed mortgage?

The safest option is to wait for the Reserve Bank's decision on Thursday and see what the banks then do about that. If the Reserve Bank cuts the Official Cash Rate then the banks should cut their floating rates by the same amount anyway, meaning anyone on a floating rate benefits almost automatically.

The only loss in any decision to sit on your hands for 10 days is the potential difference between 6.2% and 5.95%.

If, as now widely expected, the Reserve Bank does not lift the Official Cash Rate for the next year then a floating borrower loses little and retains the flexibility to ride the rates lower in future. It all depends on your interest rates outlook.

The chances of big rate hikes soon were destroyed on 12.51 pm on Tuesday, February 22.