Opinion: Interest rates still have further to go

Two upcoming economic releases should renew and re-energise the downward pressure and trend on term swap interest rates and drive them conclusively below 7.00%. The Reserve Bank of New Zealand’s Monetary Policy Statement on September 11 should outline their full reasoning for a dramatic U-turn on monetary policy settings back in June. Basically, the medium term inflation risks have reduced substantially with an economy in recession. Second-round inflationary risks from higher oil and food prices also appear not to be the threat the RBNZ foresaw earlier in the year. The same could be said about upwards pressures on wages feeding into inflation. The labour market continues to weaken with the services sectors (banking/finance, real estate, telecommunications and media) now also shedding jobs after the job layoffs in the big productive industries of meat, manufacturing, fishing and forestry. The RBNZ statement will read completely differently to their previous statements and they will also be relieved that global oil and commodity prices are now falling back. The second key announcement will be the June quarter’s GDP growth figures on the 26th of September. Forecasts are for another negative quarter (between -0.3% and -0.5%) following the substantial reduction in retail volumes during the quarter. The RBNZ may also not be as worried as they once were about the impact on inflation from the depreciation in the NZ dollar. Retailers are discounting the price of goods to move them for cashflow reasons, not putting their prices up because of the lower Kiwi. Importers are hedged nine months forward on average in any case, so the inflation impact will be muted and delayed. Looking into 2009, I do not see 90-day and term swap rates travelling much below 6.50% as the RBNZ have witnessed the dangers to the economy/inflation from having money too cheap for borrowers in New Zealand. When mortgage borrowing rates get as low as 6.00% because 90-day rates are in the 5.00% region, Kiwis borrow to the hilt to fund the tax-free property speculation game. It just causes property market boom/bust cycles that we need to get away from. It also causes undue exchange rate volatility up and down. Neither does the long term economic growth prospects any good. Hopefully the lessons have been learnt that stable wholesale 90-day interest rates in the 6.50% to 7.50% area are in the best interests of this economy. Higher and lower rates do a lot of damage. ------------------ *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.