Opinion: Moneymarkets will overshoot - it is a question of how far

By Roger J Kerr The moneymarkets continue to price market interest rates sharply downwards. The markets have so far chosen to ignore the latest RBNZ economic forecasts that predict the economy to recover back to positive GDP growth in 2009. The RBNZ will not be able to forecast CPI inflation going below 1.00% if GDP growth is forecast to be over 2.00%. The markets are instead favouring the "Armageddon" economic scenario promulgated by their own economists who are uniformly dark and gloomy on the outlook. Having failed to forecast the recession we are now in New Zealand, the bank economists now see no way out. Their economic horizon is unfortunately overly clouded by short-term market events. They find it hard to stand back and see the wider economic picture, which is that New Zealand is a producer of food that the world needs, we went into recession earlier and thus will come out earlier. It is become increasingly more apparent to me that the moneymarkets will over-shoot and price interest rates too low over the coming period. Provided export commodity prices can stabilise over coming months, I see an export-led recovery in the second half of 2009. The RBNZ should be "on hold" with changes to monetary policy settings from February 2009 on, with the OCR being at the ultimate low of 4.75% or 4.50%. The bank and other economists who are forecasting our interest rates to fall lower to 3.50% next year are too pessimistic on the NZ economy in my view. Lower mortgage interest rates and the lower NZD value will start to lift business confidence in the New Year. Consumer confidence may take a little longer to show some recovery, but further falls from here are unlikely.    --------------- *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