By Roger J Kerr
Does the general election result change anything in terms of the outlook for future interest rate movements?
I doubt it, because international economic and financial market developments continue to dominate the sentiment and near-term direction of the local interest rate market.
A National Government is returned to office, so really not a lot has changed.
It still appears to me that in pricing-in interest rate cuts over the short-term and virtually no increases over the next 12 months, the NZ moneymarkets are still over-reacting by almost assuming an Armageddon/doomsday economic scenario is a given.
My view remains unchanged in that an economic recession and maybe bank failures in Europe does not automatically drag the US and Asian economies down.
In the very short term, ISM and PMI data in the US and China respectively this week, together with US employment figures on Saturday morning, will sway general market sentiment.
On the assumption that we do not have a global double-dip recession, the greater risk remains that our interest rates from 90-days to 10 years are 1.00% higher in 12 months time. Current market pricing is a long way below such a forecast.
The more likely scenario in 2012 is that Governor Bollard finally has the opportunity - after being stymied by earthquakes and the European crisis this year - by June 2012 to remove the emergency monetary stimulus put in place in March 2009.
The evidence and justification for his action in June 2012 will be an economy growing at 3.0% and the inflation risks that come with that, as well as the inflation that comes from an under-resourced construction sector.
The current interest rate market pricing of potential cuts to the OCR appears very much at odds with the sentiment and pricing in the currency and equity markets. They are not pricing-in Armageddon.
The 8 December Monetary Policy Statement will be circumspect with all the uncertainties around Europe, however Governor Bollard will certainly not be endorsing the current market pricing of OCR cuts.
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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
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