Opinion: Why Alan's cunning plan is a good one

By Roger J Kerr For a pleasant change the RBNZ have followed our prescription for monetary policy settings at this time and thankfully not bowed to market pressures to prematurely tighten monetary policy in early 2010. The RBNZ statement accompanying the OCR review last Thursday correctly looked above the daily "noise" of the moneymarkets and bank economists attempting to generate market volatility for their traders with miss-guided calls for an early tightening in policy. The RBNZ "lower for longer" interest rate policy stance is fully justified in my view given the following realities of the NZ economy:

• The high NZ dollar value has already considerably tightened monetary conditions and lowered tradable inflation going forward.
• Fiscal policy must be tightened by Finance Minister Bill English in next year's budget as tax revenues fall away due to the recession. Government spending will be curtailed and reduced, which means the RBNZ do not have to be so tight with monetary policy to contain inflation/demand. PM John Key also espousing in Japan over the weekend that monetary policy always "needs some mates" to control inflation and give the economy the opportunity of growth. Finally, we have politicians in Government in New Zealand who understand and recognise the importance of coordinated economic policies (fiscal and monetary). The previous lot spent up large and raised prices; leaving borrowers and exporters to carry the burden on excessively tight monetary policy for too long (2006 to 2008). Another way of looking at the fiscal/monetary policy connection is to conclude that Alan Bollard has cunningly painted Bill and John into a corner.
• Prior to last Thursday, interest rate pricing in the one to three year part of the yield curve suggested that stronger housing/retail sectors would drive up inflation and prompt the RBNZ to increase interest rates in early 2010. The economists forecasting that housing/retail growth in my view lost sight of the constraint a rising unemployment trend has on consumer activity. Job insecurity is not just in the private sector, the Ministry of Health is shedding jobs, as will the new amalgamation of local councils in Auckland. Employment figures due out this week will be a sombre reminder of economic reality to those who cannot see past their computer screens. Credit reporters Veda Advantage, banks and finance companies are all reporting growing arrears, defaults and bankruptcies by borrowers and bill-payers. A revival of 2006/2008 housing and retail conditions is just wishful thinking on the part of those who optimistically fill in those consumer confidence surveys with hope rather than reality.
• Exporters have seen profitability from their markets slashed due to the NZD currency appreciation and will not be investing in increased production. The economy will really struggle to get anywhere near +3.00% GDP growth in 2010 with exporters hurting, thus inflation risks are low.

Only a dramatic and early plunge in the NZD/USD exchange rate to 0.6000 over coming weeks/months will change the "lower for longer" interest rate outlook. Outside that occurring, the steep yield curve encourages borrowers to take more floating rate risk for another 9 to 12 months at least. ____________ * 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