By Roger J Kerr
The (OCR Official Cash Rate) review this Thursday by the RBNZ will not shed much light on the likely timing of interest rate increases from the current “super loose” monetary policy settings. The RBNZ will highlight the booming export prices, how rural NZ is still repaying debt to the banks and not yet spending and the economy being disrupted this year by the earthquake.
Whilst the RBNZ may be comfortable with current core inflationary pressures being “subdued” (outside food and energy), they will be very uncomfortable about forecasting the annual inflation rate being closer to 3.00% than 2.00% in 2012. Such an inflation forecast would normally force them to be tightening monetary policy today; however they cannot do that for obvious reasons, therefore their inflation forecast will not be near to 3.00%.
As discussed in this column last week, there are many compelling reasons why future inflation in NZ is going to be well above current complacent forecasts. I heard a bank economist on the radio this morning (the non-commercial station that runs on taxpayer’s generosity, not commercial ratings!) say that current and future inflation was “subdued”. What planet do they live on? Obviously they do not get out much.
My reading of price-setting behaviour by business firms over the next 12 months is that they will be seeking to recoup current compressed profit margins (due to increased input costs) with selling price increases as end demand lifts over the next 12 months. Add in higher wage claims after several years of zero increases for many workers and you have an environment of supply-side price pressures that the RBNZ and complacent bank economists cannot ignore.
How local investors and borrowers see the short-term interest rates moving in the future in response to inflation and thus monetary policy responses is in many respects captured in the three-year swap interest rate.
Since the rebound up to 5.30% in late 2009, the three-year swap rates has broadly remained below a downtrend line (see chart). A move back above 4.00% would break above that downtrend line, and this appears far more likely than staying below it going forward. Given the 2012 inflation forecast of 3.00% it is very difficult to see the three-year swap rate being too much below 5.00% in 12 month’s time.
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* 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
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12 Comments
I agree with Roger. It has been a long time since I have seen such rampant inflation. Its out of control and Bollard down in Wellington on his bloated salary would not know the price pressures that the"peasants" are facing on a daily basis. This is not going to end well. Cheers
Why pay him anything. He is just a mouthpiece for what Key and English tell him to do. Just hire someone for $100 an hour to come out every six weeks and read out the Key and English report. Clark and Cullen also had him by the balls as well. He is about as much use as tits on a bull!
He resorts to insults to make a point that is without foundation...hey Westminster...on your poor understanding of economics and markets, cutting the rates again would bring better times...utter rubbish but you refuse to accept it because that would blow a hole in all your arguments.
The fact is if we do not start to save as a nation..that means each of us and our stupid govt, then we will not progress past this recession environment...now why would people save given they are being offered piss poor returns and being taxed on them and saying goodbye to 3 to 4% of the value of their savings as the govt/RBNZ deliberately allow inflation to eat away the dollar.? Oh sorry...that's way too much for you to work through isn't it.
A higher rate is an encouragement to save Westminster...it rewards saving...it discourages the demand for debt based splurging...it leads to a decline in property prices and that leads to affordable housing..more disposable income to save..less wealth being torn from the country by the banks...
A higher rate would put the kiwifx up and that would lower petrol prices and that would mean people had more cash to save...in simple terms for you Westminster...food freight costs would drop....but then you refuse to see that don't you.
More cash to save, to invest, to spend leads to jobs being created...too much for you to accept isn't it....doh.
Bollard is punishing savers and giving a break to all those with debt.
As a saver I find this morally repugnant, especially since I listened to him a few years back and saved instead of entering other investments.
Interest on savings should at least be able to keep up with inflation. There is a smell around my hard earned savings, they seem to be rotting away.
Morally?
The interest rates change over time they go up, they go down, a few years back floating mortagages were 10%+ I didnt whine that the impact on my pocket was morally wrong.....
Its simple as per any business or investment there is a risk that the Govn does something you dont like or profit from.....so you have to cover yourself from its effects....or take the impact on the chin and get on with it.
I just dont see that savings in a deposit account which is essentially a risk free rate of return should indeed attract a high interest rate when real investment in maing say a real good is far riskier and isnt paying back much....
On the bright side I expect deflation soon....so if you are indeed in cash or its equiv you may well get the last laugh...
regards
Part of the RB/Bollards job is not to let things get out of hand due to dramtic and panic announcements...If bollard did make such dramatic statements as " I see rampart inflation next yr" all hell would break loose..there goes any sence of stabilty...markets would react dramatically..
To even consider critising Bollard for not doing so is illogical.
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