By Roger J Kerr
Expect Governor Alan Bollard’s swansong Monetary Policy Statement this Thursday should not cause too many ripples on the financial markets.
The timing of how and when NZ short-term interest rates will be moved off their 2.5% emergency levels put in place three and half years ago (extended by the earthquakes) is being determined by international economic developments that are keeping the NZ dollar at elevated levels.
Domestic economic trends are playing second fiddle to the global forces on the NZ dollar.
While the NZ dollar stays above 0.8000 monetary conditions are already tight enough and interest rates cannot be increased. Every economy in the world it seems wants a weaker currency to aid their own export-led recoveries; however as currencies are relative prices they cannot all go down.
With +3% GDP growth in Australia and NZ at a similar run-rate over the first half of 2012, the AUD and NZD currencies have until now stood out as safe and secure places from declining exchange rate values elsewhere.
The Europeans and Americans are now set to ease monetary conditions further in some shape or form.
The Reserve Bank of Australia should also be forced to change their tune very soon and are expected to cut rates again within the next couple of months.
It appears that the movements of the AUD against the USD over coming months will be the key determinant of when interest rates change in New Zealand.
RBA actions will determine AUD direction. As the NZD/USD exchange rate follows the AUD/USD there are two potential scenarios for our exchange rate (thus timing of interest rate changes in 2013) over coming months:
- Scenario One:
Despite a limited QEIII monetary stimulus in the US, the RBA cut interest rates and the AUD depreciates significantly (dragging the Kiwi dollar down). Continuing weaker Chinese economic data and still falling hard commodity prices is required for this scenario to play out. A lower NZD value to the mid 0.7000’s over the next six months provides the room for the RBNZ to lift the OCR by mid 2013 as domestic growth/inflation trends justify it.
- Scenario Two:
The USD itself weakens on QEIII and the AUD and NZD remain at their current elevated levels over the next six months. Under this scenario there is no room for new RBNZ Governor Wheeler to raise interest rates and in any case NZ GDP growth will be lower as the high NZ dollar hurts the export sector. A weak USD globally means higher hard commodity prices, which supports the AUD.
Take your pick on what scenario eventuates into reality; I favour Scenario One.
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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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