Opinion: Export prices key to interest rates

By Roger J Kerr Some pundits might say that there is still no sign of the bottom in this collapse of markets interest rates we are witnessing. The reality is that no-one will pick the bottom until we are well and truly past it and bill/swap rates have jumped up by 1%. For these reasons, APRM is advising its large borrowing clients to not even attempt to pick the exact timing of when this down-cycle in interest rates will bottom and reverse. Instead, the most prudent advice is to recommend to borrowers to chip away at fixing rates via the swap market over the next 2 or 3 months by drip-feeding in small amount every week.

What I do have much more certainty about is that 5 to 10 year Government Bond and swap rates will be considerably higher in 12 and 24 months time as the tsunami wave of debt supply from borrowing Governments around the world attempts to find investors to buy the stuff. As the global economic picture deteriorates daily, local bank economists are directly translating this news into a deeper and longer recession in New Zealand in 2009. They are now all forecasting our GDP to contract by between 1% and 2% in 2009. Many seem to have completely forgotten about the independent RBNZ and its statutory requirement to conduct monetary policy in accordance with the Policy Targets Agreement ("PTA"). The local bank economists seem to be saying that New Zealand should slash interest rates further to 2.5% and 3.0% to restore growth and forget about inflation i.e. exactly what they have done in the UK and US. These are the very same bank economists who put in submissions to the Parliamentary Finance and Expenditure Select Committee enquiry into the monetary policy framework in 2007/2008 that said do not change a thing with the 1%-3% inflation band and growth/employment objectives should not be added. You can't have it both ways fella's! Under their current mandate the RBNZ must maintain monetary policy consistent with their 12 to 24 month inflation forecast. It is very doubtful that we will see the RBNZ adjusting their 2010 inflation forecast from the current 2.7% to below 1.00% this Thursday at their OCR review. They will reduce the OCR by 1.00% to 4.00%, but from there my advice to Alan Bollard is to go into an "on-hold" stance and wait and see what happens over the next six months in the NZ economy. Whilst the RBNZ have a 2010 inflation forecast above 1.00%, there is absolutely no justification for the "super-loose" monetary policy settings the bank economists are advocating. Whether the NZ economy falls deeper into recession this year, or starts to stage some form of export-led recovery later in the year depends heavily on our export prices. Recent signs are that dairy, lamb and beef international prices are stabilising. Other food commodities such as grains and soya have pulled out of their nose-dices downwards. Too many local economic forecasters are automatically extrapolating the 2009 global recession into substantially lower export prices for New Zealand. Substantially lower export prices from here are definitely not a given and I think it is dangerous to assume so.    --------------- *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