By Roger J Kerr
One would have to expect that the RBNZ will not be as upbeat on the outlook for the NZ economy as we are, when they report with their quarterly Monetary Policy Statement this Thursday.
They will continue to be cautious about risks from Europe and the global economy adversely impacting on the NZ economy.
I repeat my broken record that I just do not see these so-called headwinds for the NZ economy occurring at all this year, and to date the evidence of stronger US and Chinese economic data over recent months is that Europe’s problems are not dragging down the global economy.
No doubt the RBNZ economic forecasters will take the overly-cautious route and forecast a +2.00% GDP growth rate and +2.00% inflation rate for the next 12 months. That would suggest no indication of changing the OCR later this year.
They would be wrong in signalling such a benign growth and inflation outlook and might wake up by May/June time to the fact they have underestimated growth and inflation risks in the economy.
Therefore, all borrowers are well advised to fix before the rush pushes swap rates up further later in the year (swap rates are already rising).
The risk of a global double-dip recession has disappeared, so why would borrowers with a medium to long-term outlook hold back from fixing now at still record low market interest rate levels?
Other areas of interest to reconcile my views to the RBNZ view of things include:
- Do they still hold the bank-economist line that farmers are all still repaying bank debt? The reality is that farmers are now reinvesting big time in their businesses (spending on fertiliser and new equipment) and have moved on from the “de-leveraging” phase.
- Do they continue to ignore the current upwards price pressures on electricity, rates, insurance, beer, petrol, dog licenses (?) and house construction costs?
- Do they continue to ignore the perennial problem of large parts of the NZ economy lacking true market competition and this continues to be the largest risk to inflation we have. As per normal, the RBNZ statement will fail to mention “competition” as the most important component of inflation control.
- Should the RBNZ be as complacent as they appear to be on the now clear pick up in prices and activity in the Auckland residential property market? Latest consents and work put in place data tells us that the long-awaited recovery in the building sector is already underway.
- Increases in bank lending margins due to the banks paying higher credit spreads in international debt markets has already occurred, it is not really a risk of increasing further. Spreads on Aussie bank credit default swaps in Europe and now reducing and local debt issues by ANZ and Rabobank are being snapped up by investors. It would be disappointing to see the RBNZ over-emphasise this credit spread factor as a reason not to raise the OCR from 2.5%.
In a nutshell, what the RBNZ say this Thursday will be different from what they will be forced to admit (in terms of a stronger economy and thus future inflation risks) come their June and September MPS statements.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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