Some key 'take-outs' for those with interest rate risks from last week’s RBNZ Monetary Policy Statement and associated media conference:
- The New Zealand economy is far from dead (note forecasts of +3.5% GDP growth rates) and thus future inflation risks are also therefore far from dead.
- The current level of the OCR at 3.50% is "still expansionary", thus given the already robust growth outlook it is difficult to sustain an argument that a lower OCR is needed to help the economy deliver some growth. So bad news for the deflation doomsayers who were calling for OCR cuts last week.
- The RBNZ is appropriately "looking through" the plunge in oil prices and therefore is not basing its monetary policy settings off the very low current annual inflation rate (even though it is below the 1.00% bottom limit of the target range), however their job is to look forward at future expected economic and inflation conditions i.e. 12 to 18 month ahead.
- The RBNZ does however examine the second-round price changes emanating from the lower oil prices i.e. air-fares, freight charges - "The most critical thing, how does wage and price setting behaviour change in response to lower oil prices?"
- "Positive output gap, strong employment growth, record migration trends and record labour market participation" - does not sound like an economy that requires lower interest rates and/or a lower currency value to get ahead.
- In respect to the official RBNZ 90-day interest rate track over the next two years, it needs to be remembered that it is not their forecast, but just the output from their model that is required to push inflation back to the target midpoint (i.e. they have little belief that the flat outrun will actually take place).
- The new norm for "neutral" monetary policy settings in New Zealand is now confirmed at an OCR of 4.5%.
While the risk of increases in short-term interest rates remains benign for the meantime, the risk of medium to long term rates increasing is dependent upon the US bond market movements, not the RBNZ or the NZ economy/inflation.
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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
2 Comments
it's only strong if we keep borrowing.
http://www.nationaldebtclocks.org/debtclock/newzealand
NZ Debt levels- high stakes gamble that relies heavily on improving global economy
http://truebluenz.com/2015/02/25/nz-debt-levels-high-stakes-gamble-that…Grant Robertson : Despite that answer, can he actually confirm that New Zealand’s gross debt has gone up by $51 billion under his watch and now represents 36.1 percent of GDP, an increase of 18.2 points since he took office?
Hon BILL ENGLISH : The figures will be roughly pointed in the right direction, although I cannot confirm the actual figures, but it is a bit ironic coming from a party that has advocated more spending the whole way through the last 7 years.
Grant Robertson : Further to that answer, can he confirm that net debt is currently $66 billion, or 28.1 percent of GDP, compared with $12 billion, or 6.8 percent of GDP, in 2008, a fivefold increase under his watch?
http://www.parliament.nz/en-nz/pb/business/qoa/51HansQ_20150224_0000000…
Interesting 'debt clock for NZ' you link to there Andrewj.
But I think there is an issue with it. It is showing more than $6 bln too much. That comes from the way debt clocks work - they need constant attention and this one is obviously not getting any. It was set back in the days our debt was rising faster than today and the 'clock' just kept adding to it at that older rate.
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