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Roger J Kerr says the CPI figure to be reported on April 18 will be crucial for the direction of interest rates

Bonds
Roger J Kerr says the CPI figure to be reported on April 18 will be crucial for the direction of interest rates

By Roger J Kerr

The RBNZ have clearly signalled that they will do another 0.25% cut in the OCR to 2.00%.

The current market debate is whether that timing is late April or early June.

The short-term interest rate market is pricing a 30% chance of a late April cut at this stage.

That probability percentage will increase if the NZD/USD exchange rate moves up to above 0.6800 again and/or dairy prices weaken further over the next few weeks. Neither are likely in my view with Wholemilk Powder futures prices still pointing upwards despite recent news of even increased milk production in Europe despite the very low prices.

Also coming into the RBNZ’s decision making equation will be the March quarter’s inflation result on 18 April. The RBNZ are forecasting a 0.2% increase for the March quarter, a forecast that could prove to be on the low side if anecdotal evidence of substantial price increases for imported consumer goods over recent months comes through into the official inflation measures.

New Zealand inflation data has a very lop-sided look to it over the 12 month-period to December 31, 2015.

As the chart below shows, all the price decreases that produced an annual inflation rate of just 0.1% for 2015 came from only two of the 11 sectors that comprise the Consumer Price Index.

Should Transport and Communication prices just stay stable in 2016, the massive off-set against other price increases will not repeat this year.

The inflation Emperor may have no clothes if Transport and Communication prices were to increase from here. Highly unlikely for Communication prices, however recent increases in crude oil prices are lifting petrol pump prices. House construction, rentals and utility prices were up 2.8% in the year and show no sign of slowing down with the population continuing to grow around 2% annually as net migration remains strong. Health and Education sector price increases are somewhat disturbing with virtually no wage increases in those sectors.


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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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2 Comments

Really, CPI is crucial for interest rates? You don't say

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Why am I not surprised that only one person could be bothered making a comment on Roger Kerr's article? I can't remember a time when he wasn't banging on about the prospects for higher inflation being 'just around the corner'.
I have just finished "The End of Alchemy", Money, Banking and the Future of the Global Economy, by Mervyn King. he was of course Governor of the Bank of England for many years. Let me quote very briefly from it; " What is the market expectation today of where the 10 year real interest rate will be 10 years from now? A little further on in the same paragraph he writes; "Such a calculation reveals that the 10 year real interest rate has averaged little more than 1% in recent years and by late 2015 was still below 1.50%, well below any level that could be considered 'normal'. Markets do not expect interest rates to return to normal FOR MANY YEARS(my capitals).
Who do I believe; Roger Kerr or Mervyn King? Hmm, that's a tough one.

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