By Roger J Kerr

All borrowers, be they households, business firms or the NZ Government have successfully negotiated the Standard & Poor's credit rating test last week with no downgrades and margin increases.

The Government's budget was all about trade-offs and choices within a limited room to move given the plunge in taxation revenue. No real implications for the interest rate markets, other than long-term rates, like everywhere else in the world, are much more likely to move higher as the additional supply of Government bonds comes onto the market.

The level of market interest rates and the slope of the yield curve should remain relatively stable over coming months in my view. The variables that support stable to lower rates are lower inflation risks, reducing bank borrowing margins/credit spreads and generally weak borrowing demand. The increase in Government Bond issuance (particularly the US Treasury bonds driving NZ and Australian long-term bond yields higher) and signs of the worst being over in terms of the global economic turmoil support an upwards pressure on interest rates.

There is no question that term swap rates were driven down too low in February and they have now returned to more appropriate levels for the environment we have.

The real question for borrowers is how long the RBNZ can keep the OCR and 90-day rates artificially low in the face of a recovering economy. In March the RBNZ forecast a +4% GDP growth rate in 2010. Treasury's GDP forecast for the year ended March 2011 is for a +1.8% growth rate, similar to what we would expect.

However, since early April the RBNZ's various statements seem to be based off a much more doomy/gloomy economic outlook. They appear to have been heavily influenced by the negative OECD and IMF reports on the NZ economy that at the time looked 6 to 12 months out of date to me.

More recent economic data on housing starts, business confidence and consumer confidence have portrayed a more positive economic outlook. It is going to be fascinating to see what economic outlook is contained in the RBNZ Monetary Policy Statement on 11 June. Some consistency of view would be helpful.

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* Roger J Kerr runs Asia Pacific Risk Management. 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