Opinion: Tough questions for tough times

By Roger J Kerr Some questions and some answers from the world of interest rate markets, banking and borrowing (format pilfered from broadcaster Paul Holmes). Q: Will RBNZ Governor Alan Bollard come up with some workable suggestions/answers to the Government's request on how to lower bank lending margins? A: What do you think? Q: The Government are correctly pointing out that the manufacturing/productive sector industries in New Zealand have been in recession for five years i.e. contracting since 2004. What caused this to happen, who is accountable and could it have been prevented? A: Ask Alan Bollard, he was running monetary policy through this period and thus determining interest rate and exchange rate levels that forced many of the manufacturers to leave town. Two official enquiries, one into the monetary policy framework and the other seeking additional measures to control inflation over this period came up with the view that everything was fine and dandy, and there was nothing more than could have been done "“ Yeah Right!? Q: Is the current PM and Minister of Finance likely to investigate the damage monetary policy management/structure has done to the economy and force some changes to the PTA/framework? A: No, not in the current three-year term of Government, there are other more important issues to get on top of and monetary policy is now super-loose anyway. Q: Should the Commerce Commission be investigating competition and pricing in the banking sector, as they did for the electricity sector? A: They should, but won't, as it is all too hard and they do not have the resources. Q: Why have house prices not reduced by 20%-30% as the so-called gurus predicted? A: 1. Households adjust their financial affairs very rapidly to changing circumstances, quicker than what most imagine. 2. Mortgage rates are generally lower than expected. 3. Immigration inflows are increasing. 4. Shortage of second-hand stock (listings) to sell and shortages of new houses being built. 5. Still a tax-friendly investment environment. 6. The economic downturn, thus unemployment and job insecurity are not as severe as many expected 3-6 months ago. Q: Will New Zealanders ever have confidence that house prices, interest rates and the exchange rates can go across the page and stay within reasonably tight ranges? A: I doubt it, not unless we address the serious issues discussed above. Q: Do mortgage borrowers go 100% floating, or fix for 1, 2, 3, or 5 years? A: Alan Bollard (and some banks) would say take the money and risk of the lower floating and one year fixed rates. Conversely, the market (the yield curve) is pricing in substantial interest rate increases over coming years. Like a wimpy economist, I would sit on the fence and back it both ways by fixing 50% for one year and 50% for 3 years. Q: The world economic outlook appears to be improving, is the NZ economy still vulnerable? A: The forecast export-led recovery does have some current headwinds with the dairy industry and diary farming incomes under pressure from the weak USD exchange rate and falling wholemilk powder prices. Q: Where will 90-day wholesale interest rates be in 12 months time? A: Somewhere considerably above the 2.90% the RBNZ are assuming and forecasting. "”"”"”"”"”- * 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