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Roger J Kerr asks how sustainable the current totally “flat” NZ interest rate yield curve is

Bonds
Roger J Kerr asks how sustainable the current totally “flat” NZ interest rate yield curve is

By Roger J Kerr

How sustainable is the current totally “flat” NZ interest rate yield curve, which prices 90-day rates at 3.60% and 10-year rates at 3.80%?

Here are some thoughts to help you answer that question.

US economic data points to rising long-term interest rates going forward from the current artificially low levels caused by investor’s worries about the Ebola virus, oil, Greece and Ukraine. Looking ahead the dissipation of the geo-political event risks should see the economic forces prevail.

Despite what most local economic commentators currently espouse, inflation is not dead in New Zealand. Importers of consumer goods are already lifting prices due the 18% depreciation of the NZD against the USD. The high NZD against the AUD will not offset any of these price increases as we only import a small amount of grocery products and household items like beds from Australia.

The RBNZ would much prefer to have neutral monetary conditions from a lower currency value than lower interest rates. Lower mortgage interest rates would only fuel the already hot housing market and add to inflation through the “wealth-effect”.

From current price levels the future prices of commodities, construction, house rents, electricity, local government rates, health services and even petrol pump prices seem more likely to be higher than lower.

We have yet to see any significant wage increases as a result of the stronger labour market; however, it is only a matter of time after the traditional lag that higher wage inflation starts to emerge. The RBNZ may pontificate that immigration inflows add to the labour supply and keep wages steady; however, businesses continue to report skill shortages.

It will be interesting to see if the RBNZ consider these factors when they dissect the inflation outlook in their upcoming Monetary Policy Statement on March 12th.

Daily swap rates

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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Roger J Kerr is a partner at PwC. 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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1 Comments

May as well concede defeat on this one for the last 6 years. 

The trend is Down. 

The RBNZ is not going to hike for a long time. 

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