Roger J Kerr finds nine reasons to like the new broom at the RBNZ and sees rates rising modestly in the future. Your view?

 By Roger J Kerr

The first OCR review statement from the new RBNZ Governor, Graeme Wheeler last week was as bland and predictable as it should have been.

Governor Wheeler has rather quickly delivered a clear message to the market that he is no shrinking-violet dove that is easily led or persuaded by moneymarket pricing of lower interest rates and/or lobby groups calling for the RBNZ to do something about the “high” NZ dollar value.

The statement was not as dovish as many had wished for, however it was very much in line with what this column bangs on about.

Governor Wheeler’s subsequent speech on Friday provided more insights into how he views New Zealand’s economic position and what monetary policy can and cannot do to help non-inflationary economic growth i.e. lift per capita income.

His message to all and sundry was appropriately both blunt and succinct.

The new Governor is clearly his own man and has already displayed that he intends to take a leadership role on issues the NZ economy faces and needs to face up to.

At the risk of paraphrasing and overly simplifying complex arguments, the helicopter economic overview from the new Governor was as follows:

• More investment needed in our own productive sector – next month’s Fonterra TAF listing provides the first opportunity to do this more easily

• It is not the time to go soft on inflation control as many are calling for – the benefits of price stability far outweigh any short-term pain for some

• Additional macro-prudential instruments is just a fancy name for keeping wayward banks under control when they get carried away with credit expansion and overly-aggressive lending

• No justification for quantitative easing in New Zealand – we are not desperately in the poop and do not have our interest rates at zero, unlike most others

• At last! A RBNZ official who understands the importance of “competition” in the economy as the primary tool to control inflation

• To those who think the NZ dollar is way overvalued at 0.80 cents to the USD, take a look at our terms of trade (export prices against import prices) being at 40-year highs to support that higher currency valuation

• Introducing controls on foreign capital inflows as a method to keep the dollar down “would damage the credibility and stability of our financial sector and increase the real cost of capital for New Zealand”

• None of the four criteria/prerequisites for FX market intervention to sell the NZ dollar are fulfilled

• New Zealand needs to tackle its addiction of depending on foreign savings to finance our consumption and investments – we have started that change process through KiwiSaver funds and the NZ Super Fund

The new broom at the RBNZ appears to add up to our interest rates eventually returning to higher levels than current, however not as high as historical averages.

The new norm for 90-day interest rates will be in the 3.5% to 5.0% range when the global economy returns to some form of normality.

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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