By Roger J Kerr
The NZ economy continues to roll on with little in the way of risks ahead to threaten the forecast 3.5% to 4.0% GDP growth next year.
Six months ago every industry sector in New Zealand was booming along very nicely, with the one exception of low international commodity prices decimating confidence and incomes in the world of dairy.
Today, that picture has changed dramatically with the ramp up in Wholemilk Powder market prices and a lower NZD/USD exchange rate allowing Fonterra to shunt their milksolids payout forecast for 2016/2017 up to $6.00/kg milksolids.
If the annual inflation rate lifts up sharply from the current +0.4% over the next two quarters, then the pressure will come off the RBNZ to keep cutting interest rates.
The RBNZ will be mightily relieved that a stronger US dollar has finally arrived, albeit not for the reasons that everyone expected (a Trump US Presidential election victory).
Even though the overall value of the NZ dollar on a TWI basis has not depreciated too much to date (still 77.50), further profit-taking in the NZD/AUD cross-rate should send that exchange rate lower to 0.9300/0.9200 and bring the TWI down.
Increasing long-term interest rates and arguably confirmation building of the end of cuts to short-term interest rates will be convincing more local corporate investors to fix interest rates for longer and fixed interest investment fund managers to shorten portfolio durations.
Such decisions will add to further upward momentum in interest rates initiated two weeks ago from the sell-off in US Treasury Bonds.
Whilst the RBNZ are signalling a long period of the OCR remaining at 1.75%, the yield curve will just get steeper as medium and long term rates increase.
Eventually, provided annual inflation is back to 2.00% at the time, the RBNZ will need to increase the OCR to meet the higher market pricing.
About this time next year is the likely timing in my view for this sea change.
One would have to be a massive doomsday pessimist on the global economy over coming years to back a view that NZ interest rates can still move lower.
The opposite is finally happening.
Daily swap rates
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Roger J Kerr contracts to PwC in the treasury advisory area. 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
7 Comments
NZ is irrelevant in long term interest rate pricing. The US is relevant. Their long term mortgage rates have increased 1% in the last 6mths.
NZ can't fund its mortgages so it must borrow and pay whatever the going rate is. 4% long term in us are a predicter of 6.5% here. Is that as high as it will get? Nope. Its time to factor in 8%-10% mortgage rates.
Also highly relevant is the NZD/USD crossrate.
Expect a return to long term average 55c.
That will fuel inflation and cause the upward movement in rates to be more swift and dramatic.
As for house prices...that will be negative.
I have watched house prices multiply by a minimum of 2 while i have watch mortgage rates fall by half.
A normalisation to 8% will have the opposite effect.
Infact it could be worse especially in auckland. Those chinese are about to find see their miracle economy implode and that will knock out half the current world GDP.
Welcome to the new age of protectionism folks.
All you baby boomers must be soo chuffed with your excellent investments in brick and mortar.
Its ok, your darling national government will be there to support you.
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