By Roger J Kerr
Borrowers and investors looking for any pointers as to future interest rate movements from the first OCR review statement from new RBNZ Governor Graeme Wheeler this week will be disappointed.
The one-page report will be full of the normal platitudes, including:
• The economy was stronger in the first half of 2012 than what the RBNZ expected (however it is now slowing up due to the high NZ dollar value).
• Inflation is currently very low; however Christchurch pressures on construction resources and a sticky high non-tradable inflation measure mean that the annual rate will increase back to 2.00% in 12 month’s time.
• There remains a lot of uncertainty around the global economy, Europe in particular, however the probabilities of another European market meltdown or global double-dip recession are considered to be low.
Those seeking and expecting a cut to the 2.50% OCR will also be disappointed.
The pre-conditions that would have to exist to convince Graeme to cut the OCR in my view would be a NZD/USD exchange rate above 0.8500, plummeting agricultural commodity prices and the global economy spiralling downwards like it did in early 2009.
None of those pre-conditions are fulfilled; therefore it will be business as usual from the RBNZ’s perspective.
The RBNZ will also be conscious that household mortgage borrowing costs are already at record lows; they would not want to cut the OCR (thus reducing floating rate mortgage interest rates even further) and find they fuel a resurging residential property market and cause higher inflation down the track.
US 10-year Treasury Bond yields have increased to 1.81% and make lift higher again next week following anticipated positive US GDP, PMI and jobs figures.
Our long term swap and Government bond yields have decoupled a little from the US market of late, however it is hard to see the US to NZ bond spread contracting any further.
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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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