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Westpac economists push out expectation for OCR hike to December 2013 from September

Posted in Bonds
See video

Westpac's economics team has become the second one from a major bank so far this year to push out its expectation for an increase to the Official Cash Rate (OCR).

Westpac chief economist Dominick Stephens says in his weekly video today he now expects the Reserve Bank to start increasing the OCR from December this year. As recently as December 6 Westpac's economists were predicting a hike in September.

"We've changed our forecasts and we now expect the OCR will start rising only from December this year," Stephens says.

Westpac's fresh forecast comes ahead of next Thursday's OCR review from the Reserve Bank with Governor Graeme Wheeler widely expected to leave it at its record low of 2.5%. It also comes after ASB's economists pushed out their expectation for a first OCR increase to March 2014 from December 2013 on January 18.

In his video Stephens predicts a "slightly dovish" tone from the Reserve Bank, indicating the OCR can remain lower for longer.

"That said we don't think the Reserve Bank theme will be too extreme or involve any radical changes in stance and it certainly won't suggest that the next move in the OCR might be down. The reason for that is that the Canterbury rebuild is manifestly gaining a real head of steam at the moment and the housing market is becoming quite frothy," says Stephens.

"Low interest rates, of course, would just stimulate further causing a headache for the Reserve Bank down the line."

He says pushing out Westpac's expectation for the first OCR increase comes after Statistics New Zealand figures on January 18 showed inflation was just 0.9% last year, with the strong New Zealand dollar helping keep the price of imports down.

"I'd suggest that perhaps online retailing is helping to keep tradable goods and service prices down," Stephens adds.

Meanwhile, strong interest from international financial market participants suggests the New Zealand dollar could go higher still.

"With inflation already low, the exchange rate set to go higher, which will keep inflation down for some time, this all suggests interest rates can stay low for longer than previous thought."

Meanwhile, on January 18 ASB senior economist Jane Turner pointed out the 0.2% contraction in December quarter inflation was a weaker result than the market, ASB, and the Reserve Bank had expected. And a 0.9% annual level is below the Reserve Bank's medium-term inflation target band of 1% to 3%.

Turner also hedged ASB's push back of its expectation for an OCR increase by saying: "One risk in the Reserve Bank waiting until then is the evident heating up in parts of the housing market and acceleration in credit growth.  Both of these factors are likely to cause increasing concern for the Reserve Bank, and earlier OCR increases are still possible.  There is the small, but growing, possibility the Reserve Bank turns to its macro-prudential toolkit first if expected inflation pressures remain muted yet housing/credit growth strengthen in such a low interest rate environment."

BNZ's economists expect a 25 basis points hike to the OCR in December, with the OCR rising to 4.25% by the end of 2014. ANZ's economists expect the OCR to be on hold until 2014.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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13 Comments

Sure and they will be out

Sure and they will be out there easy targets to get kicked into his mouth.  No Central banker wants to go down in history as the cause of a recession/depression....which is what raising rates would do.
Of course as an already saved you benefit either way.  Until the banks go insolvent as the ppl with big mortgages go bankrupt.  Or then that like Greexe is doing now you will need to either pay for private health care or pay for the insurance, neither is a small cost for those over 45 and espewcially over 65.   Then you had better have the interest earning $ under the bed and possibly in gold.
I'd invest in a nice big strongbox if I was you.
regards

No, but quite happy to add

No, but quite happy to add you are making yourself look like an idiot, again
regards

Free money here for a long

Free money here for a long time - gear up team!

Free money to continue

Free money to continue forever? Yes, that is possible. However as mentioned before, being long AKL property means you are synthetically shorting rest of the world. If, as has been the case lately, they continue to get their act together, then this is more likely.
 
That chart shows money coming out of bonds, which sets value of mortgage funds.
 
With NZD flying, and 30 years fixed at 3.5%, or 15 years at 2.85%, USA is a huge buy right now, assuming you can show income through IRS returns filed, or IRD if dual res.
 

That chart shows money coming

That chart shows money coming out of bonds, which sets value of mortgage funds.
 
It would seem a real as opposed to a purported leak developed last night :
 
Treasuries Decline Most Since September After ECB Report
Benchmark 10-year yields rose 10 basis points, or 0.1 percentage point, to 1.95 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield rose the most since Sept. 14 and closed at the highest level since Jan. 4. The 1.625 percent note due November 2022 fell 7/8, or $8.75 per $1,000 face amount, to 97 1/8.
 
KangaNews
Nordic Investment Bank returned to the New Zealand market to complete the largest-ever high-grade Kauri transaction.
 
Locking in low rates while they can?

Stephen, Thanks, Is the

Stephen,
Thanks,
Is the Nordic Investment Bank for some strange reason borrowing NZD for investment in the Nordic countries; or is it loaning NZ money by investing in NZD assets? I see on Wikipedia they are effectively owned by 5 Nordic governments, with a stated aim to invest only in their own region, and in neighbouring Baltic countries. Have they gone outide that aim; or, if they are borrowing in NZD at relatively high interest rates compared to other countries' bonds, why would they do that? Would they expect the NZD to devalue? 
If they are investing in NZD, is our Reserve Bank happy that five foreign governments are helping manipulate our currency upwards?

Hi Stephen - no, the local

Hi Stephen - no, the local NZDs raised here are destined to line the lending armoury of a NZ  based bank - that same NZ institution will borrow cheap USD and cross currency basis swap with Nordic. The deal is then effectively currency hedged for both borrowing parties. I believe, but I am not 100% sure, Nordic as a recognised supra-national will raise cheap NZD due to a AAA credit rating. Hence our banks get cheaper NZD funding than they could otherwise obtain. The basis swap quote will naturally favour Nordic (receiver) to allow them to acquire sub-libor USD funding.
 
Re RBNZ - they are well aware of the situation. - I need to update the charts

Stephen, Thanks again; and

Stephen,
Thanks again; and useful links. I assume the first link is written by you- impressive.
To absolutely get my head around the Kauri Bonds; it seems the "originating" investors are at least 40-60% domestic NZ residents- nearly always our main commercial banks, who use the process to get cheaper source funds for then loaning out within NZ. But if they have in the first place invested in the Kauri Bonds, how does that end up giving them more money to loan out? Is it that they have effectively printed the money; that that money then is invested and sold as Kauri Bonds to AAA issuers such that the banks' balance sheets are larger (as the Kauri Bonds are recognised as acceptable security by our Reserve Bank) and so they can loan more money out within NZ at relatively low cost, and so higher margins? If that is the process is there a net buying of NZD in the process at least until maturity when everything is reversed? Or is there no net buying of NZD through the swap process?
Apart from some spreading of our own national risk of our own default; is there any advantage in the process to New Zealand from say the RB printing the same amount of money and loaning it to the commercial banks with some negotiation on the cost of funds?

... it seems the

... it seems the "originating" investors are at least 40-60% domestic NZ residents- nearly always our main commercial banks
 
Not so sure that's the case right now - mostly fund managers and foreigners I would have thought - There are plenty of surplus NZ dollars lying around in bank transaction A/Cs from our persistent trade imbalances as reflected in the current account deficit. 
 
But you could certainly surmise that when NZ banks' balance sheets are rising at rates significantly higher than nominal GDP growth rates (they are not at the moment) your assumptions are not far away from the truth.

Stephen Sackur (BBC Hardtalk)

Stephen Sackur (BBC Hardtalk) latest interviewee, Mohammed El-Erian (authoritative CIO of Pimco) claims Monetary Policy is a tool used to encourage or discourage risk-taking by lowering or raising the OCR.
 
The sheep are being shepherded into taking risks.