By Roger J Kerr
Three dominant variables - as highlighted below - stand out as the determinants of how quickly and how far interest rates increase in NZ in 2017:-
Speed of annual inflation increases:
Inflationary pressures in the NZ economy (as measured by the CPI) have been disguised and hidden by the dramatic collapse of oil prices in 2015 and early 2016.
As these price decreases drop out of annual CPI figures over the next 12 months the true colours of other price increases occurring in the economy are going to be more clearly seen.
When the transport component of the CPI (15% weighting) is no longer such a big negative for the overall annual rate, the jump up in annual inflation is spectacular (refer chart below).
Add in house rental prices starting to increase again (mortgage interest rates now rising and maintenance costs also increasing) and the financial markets may not be too surprised to see annual inflation increasing at a faster clip than current RBNZ forecasts for 2017.
The two year wholesale market swap interest rate at 2.50% is already pricing in multiple 0.25% OCR increases in late 2017 and 2018.
NZ currency value - Trade Weighted Index:
Global FX market weakness in the UK Pound, Japanese Yen and Aussie dollar have lifted the NZ dollar cross rates and kept the TWI at the elevated 78.50 level.
Tradable inflation will be kept lower than RBNZ forecasts if the TWI stays at 78.
The NZ dollar remains over-cooked in its value against the AUD with the two key NZD/AUD cross-rate lead indicators, interest rate and commodity price differentials both pointing to a cross-rate below 0.9000 (currently 0.9500).
A drop in the NZD/AUD cross-rate will pull the TWI down and lift tradable inflation.
How far US Treasury Bond interest rates sell off:
On the pre-Christmas Trump rallies in equities and the US dollar the US 10-year bond yields zoomed up from 1.80% to 2.60%. This In turn lifted our term wholesale swap interest rates by 80 basis points.
The 10-year bond yields have since pulled back to 2.39% as question marks arise as to whether President-elect Trump can deliver on his economic promises.
If the November/December Trump rally in markets turns into a Trump Slump the bond yields may edge a little lower in the short term.
However, looking further out into 2017 a strong US economy with associated higher import costs, higher wage costs, higher commodity prices and higher energy costs all point to three Fed Rate increases and rising bond yields to the 3.00% region.
Daily swap rates
Select chart tabs
Roger J Kerr contracts to PwC in the treasury advisory area. 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
12 Comments
There's always lag when oil prices fall. There are a lot of oil projects that will keep going until they are exhausted but when it comes to new drilling and start ups there's not much work out there at the moment so the price will eventually come up.
I'm not expecting a surge in interest rates in the US. Trump has to get any changes through the other houses even though he might think he's the dictator of the country.
The OCR and Interest rate increases are not relevant overall to the Housing market. What is relevant is the Major banks reluctance to lend with restrictions preventing developers building much needed housing in Auckland.
The family homeowners with children unable to sell in Auckland until the usual February upswing have been caught like dolphins in a massive investor trawler net called the LVR.
I'd say they are either out of work or unable to pay all of their bills which would mean they bought too much house. The reference to LVR I would presume is that investors have very little capital and are unable to finance purchases at such excessive prices. I guess the 288 motivated sellers, 95 urgent sellers and 91 overseas sellers on trademe are in a bind.
Sorry, interest rates are arguably the single most important factor in the NZ housing market. It's certainly up there with land supply and foreign buyers.
I've corrected your last sentence for you as well;
"The massive investor trawler net that was buying up ~50% of homes that could have been bought by families with children has been caught by the LVR rules"
Come on Ted ....repeat after me...."must generate better propaganda....must generate better propaganda..."
Wow.
Really.
"Interest Rates increases are not relevant overall to the housing market" ... so, anyone CAN be a RE agent eh.
It's a nice soap box you have there buddy. I guess the investors are a trawler net scraping the bottom. Good thing there are LVR restrictions (not the same as LVR)
God what another load of BS from you Ted Stanton / "Mark Stansfield" / "Paul Cranston" / "David Sumner" / "Paul Stevens" / "John Prentegast"...
(PS/haven't seen you on the NBR lately? - have they actually had the balls to block your IP address as an obvious troll?)
Cheap and easy credit has been one of (if not the biggest) driver of the RE (and equities) boom.
The only people "caught" are over-leveraged speculators who jumped in late to the bull market despite warnings from all (incl the old PM JK and Bill English when he was Minister of Finance...)
Tough luck.
Hope they take a hammering to teach a lesson to all that no market is a "sure thing" - Anyone driven by pure speculative greed deserves what they get whether it be RE or Stocks.
The same rules apply - go in eyes wide open and take your beans if you screw up.
I still cant see inflation of any meaningful level in the foreseeable future , where is it going to come from ?
Rents can only go up so far , and we dont buy or build houses every day
The Kiwi$ is strong so imports will stay low in price , and food is a commodity that reflects international prices so we cant expect inflation there .
Travel by air or road will remain uninflated .
So its only housing and utilities that will drive inflation , but will they /
Alcohol will not go up by much due to import prices being low , and tobacco is something most sensible folk dont use anyway , so it should not have much weighting
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