Roger J Kerr says central bank monetary policy settings are important for our interest rate prospects. He assesses what lies ahead in 5 key countries. Your view?

 By Roger J Kerr

The prospects for interest rate movements in 2013 in many respects hinge on how monetary policy is conducted by central banks around the world, including our own RBNZ.

The degree of easing or tightening of monetary conditions by various central banks has a massive impact on all currency values and thus the overall value of the NZ dollar.

The level of the Kiwi dollar continues to be a major determinant of local monetary conditions, inflation and economic performance and thus directly influences our short-term interest rate movements.

As the New Year commences it is worthwhile to summarise where the major the central banks are at and what the prospects for monetary policy changes are in 2013:

New Zealand:

We are now almost three years at the “emergency” OCR levels of 2.50% put in place by the RBNZ in March 2009.

The relative strength of the NZ dollar against all major currencies means that there is no prospect of OCR increases for most of this year, unless the currency falls away dramatically for some new reason we do not yet know about.

OCR decreases are out of the question given our economic performance and an improving global economy (except Europe).

While the risk of short-term interest rates going up may start to increase later in the year, long-term wholesale swap rates from two years on seem likely to increase much earlier as US Treasury Bond yields move upwards through 2013.

Those thinking about fixing mortgage interest rates should have at least 50% fixed sooner rather than later as the term swap rates increase on the bank lenders over coming months. Now that 2-year fixed mortgage rates are below variable rates, fixing decisions by borrowers will put upward pressure on wholesale swap rates as the banks off-lay their risk into the swaps market.

Australia:

The RBA were in easing mode later last year, however improved iron ore prices and some stronger Chinese economic data of late is positive news for the Aussie economy.

However, if domestic economic data does not improve in Aussie over coming months from the mortgage rate reductions over the latter part of 2012, the economy might be telling us that the high AUD currency value has done more damage than first thought.

United States:

The Federal Reserve decision to increase monetary stimulus with QE3.5 in early December was not as clear-cut as the markets assumed.

Nearly half the Fed Governors are worried about their ballooning balance sheet and would be happy to withdraw the additional stimulus earlier when the economy is proving it is on the improve.

Across the board US economic data is looking much stronger with framing lumber prices soaring just one indicator of the turnaround in their residential real estate market.

Europe:

Late last year it appears that the ECB and Mario Draghi were about the cut Euro interest rates to help their beleaguered economies.

Last week he pooh-poohed the notion that an interest rate cut was imminent, thus the FX markets sent the Euro stronger to $1.3340 against the USD.

Draghi was referring to improved financial market conditions and reduced market contagion risk, not underlying European economic conditions, which remain very weak.

Looser monetary policies in Europe seem well justified and the current Euro currency strength does not look sustainable.

Japan:

After 10 years of not doing much at all to help their economy recover, the Japanese monetary and fiscal authorities are now really going for it with stimulus packages.

The FX markets have sold the Yen aggressively in anticipation of the heavy money printing.

The sharply weaker Yen has lifted our Trade Weighted Index (TWI) to above 75 which makes life pretty tough for unhedged exporters. 2013.

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Roger J Kerr is a partner at PwC. 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