Opinion: RBNZ likely to lower GDP growth forecasts as NZ$ stays high

By Roger J Kerr It is shaping up to be a Tua versus Cameron Hamilton showdown in the interest rate markets this week as a real Mexican stand-off has developed between the money-markets and the RBNZ. Thursday's RBNZ monetary policy statement could either be a surprise knock-out punch in the first round (a surprise OCR cut) or a non-conclusive split-points decision in the 12th round and the punters seeking a re-match (RBNZ repeat concerns with the currency and the "easy" monetary bias continuing). Alan Bollard is a cautious man, certainly not a bold or courageous one; therefore one has to favour the latter outcome. In the Red corner are the financial markets who have priced the NZ dollar higher and term interest rates higher in expectation that New Zealand will be one of the first economies to unwind the super-loose monetary conditions in 2010 and increase interest rates from March 2010. The markets see the NZ economy growing positively again in early 2010. They are basing this optimistic view on the residential property market lifting, immigration increasing, domestic spending increasing, the significant improvement in consumer/business confidence and dairy export commodity prices continuing to increase. The markets have also been looking to the rising world equity and commodity markets and concluding that the worst is past in terms of the global recession and that global growth is going to return reasonably strongly. The local financial markets are also looking across the Tasman Sea and believe that the RBNZ will closely follow the RBA in unwinding loose monetary conditions next year. In the Blue corner is Dr Bollard at the RBNZ who foreshadowed a potential scenario in his June Monetary Policy statement of the domestic economy rebounding early on a housing recovery, the NZ$ appreciating prematurely, the Current A/c not improving and the much needed re-balancing of the economy not happening. The way the markets are pricing it appears that this scenario is now happening. A recovery based on the domestic housing/debt/spending will be very short-lived and probably result in credit ratings downgrades for NZ as the Current A/c deteriorates further. Dr Bollard understands the negative impact the sharp rise in the NZ dollar value is having on the export sector (including the tourism industry) and for this reason the RBNZ will be lowering their GDP growth and inflation forecasts in the MPS. The RBNZ will portray quite a different outlook on the economy (more realistic in my view) to what the excitable bank economists and property-transfixed financial media are reporting right now. There is certainly a likelihood of the markets and media being surprised at the RBNZ's more "dovish" stance than what is generally expected. At the end of the day, the track of interest rates and the economy over the next 12 to 18 months will come down to whether the productive/export sector can expand or not. These sectors ultimately drive the NZ economy, not prices of existing houses. The markets may well be correct in the next few months in terms of improvements in the domestic economy, but if the NZ dollar does not retreat to the low 0.6000's reasonably soon the RBNZ will be right, and the economy will struggle to get 0.5% pa GDP growth in 2010, not the 2% and 3% pa growth some are now forecasting. Our economy is not in the same state or position as Australia right now and Dr Bollard will be reminding all and sundry of this fact on Thursday. The Aussies will be lifting official interest rates in early 2010, at this point it is hard to see NZ following until much later in the year. "”"”"”"”"”- * 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