Roger J Kerr says upward price pressures will start to bite as the economy improves and the RBNZ can't be complacent now. Your view?

 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