What Alan will say this Thursday

25th Jul 11, 1:51pm by Roger J Kerr

The local interest rate markets will be focusing on every word uttered by the RBNZ Governor at this Thursday’s OCR review.

Having indicated in early June that the timing of the first OCR increase was being brought forward to December with a more upbeat assessment of the economy, the RBNZ have only seen stronger economic data and elevated inflation risks since.

However, I doubt that Alan will agree with latest bank economist predictions that the first OCR hike will be September.

Alan needs to buy some time here with a non-committal statement that does not signal an earlier tightening bias.

The problem is the exchange rate.

He knows all too well that any hint of the market interpreting the Thursday statement as marginally hawkish will send the NZ dollar even higher.

Typically, the RBNZ expressed surprise at the market’s bullish interpretation of the June, MPS. The RBNZ cannot afford to make the same mistake again of misreading how the markets will react to their words. A very cautious and bland statement will be the result.

Here are the main points I expect Alan to highlight on Thursday:

- The NZ economy has been more robust than they expected over the past six months, due to strong export growth.

- Inflation risks and inflation expectations have increased due to the stronger economic growth; however the higher NZD/USD exchange rate will reduce prices on imported consumer items and keep inflation in check.

- Global growth forecasts for 2011 and 2012 are being revised downwards, pulling our key export agricultural commodity prices downwards. As a result, NZ GDP growth forecasts for 2012 may have to be also revised downwards as the high NZD/USD exchange rate has a damaging impact on exporter profits, investment and jobs.

- The previous buoyant economic conditions in our largest export market, Australia have turned poorly and the previous low NZD/AUD exchange rate is no longer helping our manufacturing/food exporters into Australia.

- Overall credit growth remains very subdued, however it appears the Auckland housing market is starting to see upwards price pressures as a lack of supply of new and existing homes lop-sides the market demand/supply equation.

- The NZ dollar has strengthened on its own account from international capital flows not wanting to be in either the USD or EUR and looking for alternative safe haven currencies. That demand for the NZD is likely to reverse when the US resolves their debt ceiling issue.

All Alan can really do is jawbone the currency down, in the hope the NZD/USD rate is much lower come September/October time when he will need to start the removal of the monetary stimulus he put in place in early 2009.

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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. This column was written before the Monday quake. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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6 Comments

by Chris-M | 25th Jul 11, 4:58pm 1311569911

Where does it say in his mandate that he is required, or even permitted, to consider anything other than inflation.

If he does and does not act on inflation he is significantly failing is only responsibility.

It is not his place to change his job spec. It is the governments place to address this and these muddled responsibilities that seem to be emerging, reflect the total failure of both sides of the house to address long standing and major defects in their ecconomic managment.

by steven | 25th Jul 11, 5:21pm 1311571272

Agreed..........

regards

by scarfie | 25th Jul 11, 8:30pm 1311582610

Wouldn't it be funny if he did raise half a cent in reaction to the inflation figures. That would put some heat on JK.

by Basel Brush III | 25th Jul 11, 8:45pm 1311583556

I have always been of the opinion that AB is too, too predictable.

He needs a bit of 'mongrel' attitude to unbalance the profiteering.

A rise of 0.5% should be his minimum move for a start. Also why not out time the market by a pre-emptive strike.

by David George | 26th Jul 11, 8:56am 1311627397

"Overall credit growth remains very subdued, however it appears the Auckland housing market is starting to see upwards price pressures as a lack of supply of new and existing homes lop-sides the market demand/supply equation."

That's right and the growth in debt should be the main focus. Rising prices due to supply shortages will take care of themselves, same as falling prices due to a glut of supply. Why should the RB be even interested in that? If the central banks had paid more attention to excessive credit growth we wouldn't have a lot of the problems we are now facing and the US Federal Reserve would have to be at the top of the list in stupidity. You can't have debt growing at 10%+ in an economy thats growing at 5% (nominal) and expect that she'll be right mate.

With credit growth flat, why would the RB be even considering raising interest rates?

by Chairman Moa | 26th Jul 11, 2:19pm 1311646766

He will say "good morning" then anything after that will be bad!