By Roger J Kerr
The forward picture for the local interest rate market has changed significantly over the last week.
Previously, the money markets were happy to blindly follow the Australian interest rate market in pricing-in future OCR cuts (1.00% in Australia and 0.50% here).
Two bits of much stronger than expected economic data out of Australia last week in the form of the +1.4% March quarter’s GDP growth and May employment growth have dramatically reversed the market sentiment and direction.
Hopefully, this week’s Monetary Policy Statement from the RBNZ will also paint a more balanced picture of the NZ economic outlook than what we get from the various doomsday economic forecasters and the markets will remove the last 0.25% OCR cuts still priced-in to the forward curve.
There will be no reason for the RBNZ to be pessimistic on the economic outlook with the Kiwi dollar down eight cents and the domestic housing market clearly picking up.
While bank lending/credit growth is not yet rapidly rising to cause the RBNZ any concern, it is certainly lifting with all the banks now very keen to quote lower margin pricing to corporates and mortgage borrowers to write loan assets onto their balance sheets.
The weight of money sitting in bank deposits from insurance claims and Mum & Dad investors not sure where else to invest will start to change over the second half of 2012.
Insurance funds will start heading out the door into the Christchurch rebuild and the Mighty River Power partial-float will attract money previously lazily sitting around in bank deposits. The retail money supply/demand equation is thus about to change and eventually this will add to upward pressure on wholesale interest rates.
The RBNZ can not continue to be as complacent as they have been on the inflation outlook.
The price decreases from the strong NZ dollar for imported consumer goods will no longer be around and upwards price pressures in the non-tradable sector look likely to continue (electricity, rates, insurance premiums and building costs).
The impact of the economic meltdown in Europe on the NZ economy has been minimal to date, let’s hope the RBNZ is not as transfixed as the media on this perceived (but not actual) negative on the NZ economy.
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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
9 Comments
Roger - Your eighth word - 'market' indicates where your misguided enthusiasm is aimed.
Sad. So sad.
I suggest that you park up your Gulfstream and take a slow drive through the suburbs that used to be middleclass.
Within a little while you will come to realise that 'markets' do not create future real economy.
Most of the remaining NZ middle class have no real need for the 'market'
Roger,
And how exactly do interest rates affect the non-tradeable sector? I guess Granny will have to go down to 1 bar on the heater but I doubt that will affect the price of electricity. Of course, if she pops her clogs, we will save on the Super, so, on balance, it could be a winner for the invisible hand.
And whilst you're explaining that, can you please also explain how making people pay more for their debt reduces overall prices in the economy?
Thanks.
Higher interest rates depress economic activity ( retailers cant afford as much stock, housing activity stalls, people lose jobs, the exchange rate rises and export profitability worsens ) which reduces demand and lowers prices as sellers have less pricing power.
Thats all fairly obvious isn't it?
Quite right. An open economy with competition is much more responsive and one of the issues we have in this country is a lack of competition in some areas, although it is miles better than it used to be.
That is why the non tradeable sector ( read local body rates ) not subject to competition is one of our major sources of inflation.
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