To fix or float, that is the question

The Reserve Bank sent a strong signal to the market on June 11 when it decided to hold the OCR at 2.5%, citing the following reasons:

·         There are signs of recovery

·         Still downside risks with soft outlook for employment, wages and farm incomes

·         A lot of stimulus in the economy

·         Bank funding pressures are easing

·         NZD expected to decline

It was good to see the bank taking a firm position and sending a message to the markets.  Subsequent to the OCR announcement, Dr Bollard issued some further reasonably bullish comments at a speech on 14 July, essentially stating that the Reserve Bank believes that New Zealand has avoided a repeat of the Great Depression, and that they expect New Zealand to recover ahead of the pack.

So what does all of this positive talk mean for the average Kiwi borrower? What should we do with our interest rate structure? That is a big question.

Prior to the escalation of the financial crisis in September 2008, bank term deposit rates were generally below wholesale funding rates. In the current environment, as a result of banks focusing more on attracting funds from the local retail market because of high overseas borrowing costs, the six month term deposit rate is now significantly above wholesale rates. This is a large part of the reason why the bank lending rates are significantly higher than the OCR, and why we agree with the Reserve Bank that further cuts in the OCR will have little or no impact on the local retail interest rates that we as consumers pay. As the crisis heals and economic growth recovers, wholesale rates should increase so that they return to being higher than deposit rates.  All in all, this probably points to medium term rises in the retail interest rates, not further cuts.

Based on the analysis above, we expect longer-term borrowing costs to move higher in the year ahead.  This means we could see significant upside risk for local short-term interest rates over the next couple of years, which would imply that excessive focus on the lower shorter-term borrowing options could prove costly in time.  A prudent strategy might be to arrange a mix of short-term, medium-term and even some longer-term debt to spread the risk.

            Advantages of mixing it up

By mixing up your fixed rates over short, medium, and long term and combining it with a bit of debt left on the floating rate you get all the benefits of locking in some very cheap interest rates, while balancing that off against the flexibility of being able to pay off some debt (the floating rate portion) earlier, if you have some additional funds coming available.  We see this as a very good opportunity, particularly for those in business, to minimise their borrowing costs, providing some much needed relief to the Profit and Loss while providing a certain level of certainty around future rates and flexibility to retire debt early.

Borrowing has not been cheap for a long time – and it is unlikely to get any cheaper, so start reviewing your options now.  Failing to implement in the near future could mean a missed opportunity.

How to Save Money with IT – Part Three

In our first issue, we discussed a great way to free up a few thousand dollars per month to allow you to invest in technology which could potentially turn that money into a very significant saving or productivity gain.

In issue two we discussed Unified Communications and its role in helping your customers get more for their money from their existing investments. This issue, we de-mystify something which may appear techie at first, but is taking the world and its finance-savvy decision makers by storm.

Virtualisation is not a new technology. It’s been around for decades, although remained the domain of the world’s largest organisations until relatively recently. These days, we’ve helped companies with as few as ten employees save money with virtualisation.

‘Host Servers’ are the physical boxes you’ve got in your server room.  In the old world, you could typically get one application (e.g. your finance system) per host server. There are exceptions to this, but please bear with me for the purposes of explanation. This limitation was typically a software issue, where they didn’t like to co-exist or compete for server resources such as memory or processing power – even if there was plenty to spare. And plenty there was – most servers run at less than 10% utilisation, representing a massive waste of capital and energy to power and cool them.

Then along came virtualisation technology for the mid-market. Suddenly, running multiple applications on a single host server became possible, reliable, and achieved without performance degradation. Virtualisation technology achieves this by dividing a physical host server into several ‘virtual’ servers. As far as each application is concerned, it still has a server all to itself – little does it know its host is being shared. So if you have for instance, a grumpy application that requires an old operating system, this can co-exist on the same hardware as your shiny modern ones!

In an environment where many servers exist, virtualisation can be a biggie. In some cases, we are achieving as much as a ten-fold reduction in numbers of servers. This can produce serious savings both in the capital costs of the servers themselves, and the operational costs; not to mention the reduced environmental investment (air-conditioning, room space, etc).

Further, virtualisation became cheaper, with the arrival of Microsoft and Citrix into what was, until recently, exclusively the domain of VMware. And some variants offer side-benefits like automatic failover and instant, on-the-fly creation of a new server when required (great when a new application is being trialled, or a test server is required for fault isolation) – all of which contributes to minimising downtime (and support costs)!

So imagine a world which gives you higher utilisation per server and gives you great flexibility, yet requires fewer servers, using less space and power with less downtime – and you just about sum it up!