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Roger J Kerr still expects no OCR cut because the forward view shows non-tradeable inflation still too high. Your view?

Roger J Kerr still expects no OCR cut because the forward view shows non-tradeable inflation still too high. Your view?

 By Roger J Kerr

The chitter chatter in moneymarket/economist circles is once again that the probability of the RBNZ cutting the OCR interest rate has increased again.

The arguments are that the Aussies have moved from monetary policy “neutral” just a few short weeks ago to a firmly easing bias with one cut already made and the markets there pricing-in another 0.90% of cuts over the next 12 months.

Whatever the Aussies do, we need to follow, right?

I don’t think so.

It has to be remembered that the Aussies increased interest rates in 2010/2011 whereas we remained unchanged at the 2.50% OCR. They are just now returning to 2009 levels as the RBA belatedly recognise the impact of a slowing China and thus the mining boom changing shape.

I doubt that the new RBNZ Governor will be blindly following his Aussie counterparts.

Current forward interest rate pricing here is for one 0.25% cut sometime between March and September next year. It is not clear whether that pricing is based on the Aussie’s lead, very low annual inflation or the political protests on exchange rate policy have some believing that someone will force the new Governor to cut.

The case for cutting rates would be stronger if the economy was faltering badly and GDP growth was closer to 0.0% each quarter rather than the +0.8% per quarter we are averaging this year.

However, having said that, there are a number of good reasons why the economy will not maintain its relatively impressive growth we have witnessed over the last six months:

- The probability of weather conditions repeating what they did last summer to produce the extraordinary growing conditions is low and thus agriculture production will struggle to be as high as this season just ended.

- The prolonged period of the NZD/USD exchange rate above 0.8000 has hindered output, investment and jobs in some export sectors that don’t hedge forward their currency risk.

- Our largest trading partner, Australia has slowed up dramatically with their consumers playing it much more cautiously now.

- Confidence amongst farmers has declined to three-year lows, therefore rural spending will be taking a breather as well.

Stronger domestic activity in housing and retail in the cities may off-set some of the above negatives for growth, however unless the currency comes back soon, we are in for more subdued economic expansion over the next 12 months.

Therefore, inflation risks subside somewhat, but not enough to justify a cut of interest rates.

If tomorrow’s annual CPI inflation rate is below 1.0% for the year to 30 September it would be poor monetary policy management to cut rates in response.

Setting of monetary conditions is much more forward looking and based on a 12 to 18 month forecast of the economy and thus future inflation rate.

Non-tradable inflation continues to run at a too high a level in New Zealand to take the risk that non-tradable inflation will always be low (due to the high NZ dollar value) to offset.

For these reasons, Dr Graham Wheeler will not be entertaining an interest rate cut anytime soon.

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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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9 Comments

Surely we don't need another Eartthquake etc to make the RBNZ see common sense & Cut?

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Cut?  When house price are rising by double digit percentages annually in the big cities?  When billions are flowing in in reinsurance money?  Cut? Cut? Cut??? 

 

...it's 2003 all over again...

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Plenty of scope for investors to make good in a falling interest rate environment, Ivan.

Try moving out of NZD, even temporarily,  to take advantage.

The latest Australian rate cut took approx 2 cents off the AUD/USD rate.

A NZ rate cut will most probably have the same effect. Plus you can double down by using the USD to buy US equities, which are performing well at the moment.

 

 

 

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Ivan,

I don't have a mortgage, but I'd like to see them down; at least while we are stuck in the current paradigm of one tool only for the Reserve Bank. The NZD does need to come down for us to start paying our way in the world; and for our exporters/ manufacturers etc to have half a chance. There are better ways to get the dollar down, but world convention seems to be that you have to get to less than 1% interest rates first before undertaking such measures.

Given I think a move down is inevitable at some stage; and the world QE actions will mean inflation globally eventually, regardless of what we do, there are plenty of investments that are likely to do okay, as long as you have a broad portfolio, and look for likely relatively consistent yield.

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Westpac commentary: 

NZ 2yr swap yields are attempting to break below the 2.60%-2.80%
range of the past two months, targeting 2.50% next. NZ economic
activity is expected to cool slightly during the next few months and
Eurozone concerns continue to weigh on sentiment.
Technicals: Negative
Momentum in the 2yr swap yield remains negative ...

Which part of Negative sentiment & trend/momentum is not apparent?

 

 

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Exactly. Even the IMF have leapt in with dire warnings of impending doom for the global economy. Anyone who thinks we've lived through the Great Recession is jumping the gun - it has a long way further down to go yet.

As well as that you have everyone else on the planet manipulating their currency to get it lower, so NZ unfortunately needs to join in or risk losing out on a matter of principle.

I'm picking that NZ will eventually join the US and the UK and Europe and lower the OCR into the sub 100 base points range.

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The opposite of his prediction will hapen sooner than later..... let's wait and see. Lucky i did not believe him  at all and always go the opposite direction based from his predictions. I did well with my mortgage for the record by doing my part, a lot of reading and maintaining a good relationship with my banking advisor.

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Roger,

"It has to be remembered that the Aussies increased interest rates in 2010/2011 whereas we remained unchanged at the 2.50% OCR"

Errr, we went to 3% (followed OZ June and July 2010) and would have continued blindly doing so if it were not for the earthquake.

"The prolonged period of the NZD/USD exchange rate above 0.8000 has hindered output, investment and jobs in some export sectors that don’t hedge forward their currency risk."

Stupid statements like this are annoying. Even if a company hedges it still pays a higher x rate - maybe delayed, but it still goes up. The preference is no need to hedge up ALL the bloody time. Show me where you can hedge at a reasonable rate now, even 70c?

As usual, I don't expect you to read or reply to any comments.

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If we have an oil price spike next year will rates come down ? This may prevent rates coming down significantly further?

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