By Roger J Kerr
The next six weeks period will be a crucial time that determines the track of New Zealand’s short-term interest rates over the following 12 months.
The RBNZ will be re-booting their 2014/2015 economic forecasts in the light of the plunge in wholemilk powder prices without any currency response to date and the fact that the actual inflation starting point at 31 March 2014 is materially lower than what they were expecting.
The longer the divergence between falling dairy prices and the still high NZ dollar continues the greater the adjustment has to be to GDP growth forecasts.
The exchange rate holding well above RBNZ assumptions for this period also has to lower their inflation forecasts.
In turn, these downward revisions must lower the forward guidance on OCR interest rate increases, both in terms of timing and quantum.
Should the NZ dollar fall away between now and 12 June the pressure will come off the RBNZ to make revisions.
The interest rate market did not react to the OCR increase to 3.00% last week as it was fully priced in.
The question now is whether the expected 12 June OCR increase will be postponed to July, or cancelled altogether if the exchange rate stays at the high levels over the next six weeks.
It would be a major back-track from the RBNZ to cancel the telegraphed OCR June increase, however the economic conditions have changed abruptly and such a decision would be fully justified in my view.
Confidence about the economy remains high as measured by the various business and consumer confidence surveys, however the upcoming winter months may be somewhat tougher for the economy than most expect with lower dairy farmer incomes and rising mortgage interest rates.
Add in to the mix difficulties for manufacturing exporters into Australia, as they cannot do profitable business at a 0.9300 NZD/AUD cross-rate, and the business/economic news flow may not be so positive over coming months.
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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
13 Comments
The "rock star economy" was a smoke and mirror. the real driver for that story hasn't gone away. You won't see a drop in OCR, just more fake stories to why it needs to stay or go higher.
I wonder if Fonterra has managed to bring home the cash from its record earnings (for payouts to suppliers)
If not, that will push the NZD up, both as F has to buy hard... that and speculators getting in quick to catch the tide.
I wonder if F. will ever let their suppliers be paid in other currency of choice to foreign bank accounts, instead of letting the government forcing them to lose on the import &exchange rates
Which would be a huge loss of credibility, if so Wheeler should resign.
ergo, they wont drop because their testicles will be in charge until that is we need 1% or more. Of course such a drop will be "forced" on the RB by un-foreseen and substantial external events..
regards
Agree MB, we don't have the growth cushion of the Brics. Not sure if Wheeler and the gang will cut, but certainly a halt is on the cards if they start building an inverted yield curve. The US holds the key. It will all come down to their continued recovery, post QE. In the meantime there is caution, hence suppression at the longer end of the debt markets.
US banks are experiencing subdued credit demand, as we are here. See below:
http://www.bloomberg.com/news/2014-04-27/treasuries-irresistible-to-ame…
Not so sure on a BRICS, NZ is classed as a risky currency, so I think when some real fear comes we will indeed see some BRICS effect on us.
Cuts, not so sure yet just when, picking such an event is fraught with difficulty IMHO.
What really worries me is we are raising when I see no solid recovery, ie a clear drop and trend in unemployment. So the RB etc is guessing that 2 years out all will be well as they predicted, meanwhile the grey swans lurk (grey as in we know thereare events out there with huge impact we just dont know when).
Interesting that after 6 years of inflation is coming we now see that the inflationaistas have switched from "its real soon and big" to " its a cert for 2 years away so we have to do it now" harder to argue against of course, which Im sure is the idea....
ie whatever the problem raising the OCR is the cure!
regards
The worst possible thing the RBNZ could do now is not increase interest rates in June !
At last the housing market in Auckland is showing signs of cooling.
Not lifting or dropping interest rates would only throw fuel on the fire and prices of houses would accelerate again.
This would lead to a Labour/ Greens coalition as unaffordable house prices would be an election issue, bigger than higher interest rates.
There must be hundreds of thousands of people out there who rely on term deposits etc to supplement super.
Using Kiwisaver to subsidise property investors as Labour is proposing is obscene.
You are making an assumption, here, ie you have no proof that not raising will bring back the market. For instance the LVR seems to have already turned the market, ergo until we see a firmer turned (or not) I cant say raising more makes sense, especially as the over-heating is in some areas and not overall.
Term deposits is a different issue, I mean you can take your money out and invest it in something giving a higher return, no "saved" is forced to keep in in a deposit account. Take a look at Japan, the deposit interest rate is almsot zero, just why do OAPs etc think they deserve a high interest rate while around them businesses have a hard time?
regards
There is an implication in your posting that the Reserve Bank should be run by and for the National Party. One would hope that in neither case that is true.
Houses will be more unaffordable if interest rates go up more; and also if they don't, if that caused prices to again head up. The real issues to address are supply of housing, and the capital flows that are underpinning the price growth. Labour has policies to address both these issues, (limits to foreign purchases, and direct house building, among others) such that runaway house prices under them seem unlikely. They therefore have a very plausible case to make that unless National adopts their policies, housing will be more affordable under Labour.
I imagine interest rates would remain the RBNZ's main tool of choice; where Labour's policies seem likely to work best, is to realign our interest rates with the rest of the developed world, such that there would not be a self defeating carry trade effect on our exchange rate.
As the rest of the developed world lifted, so would we, all else being equal, and savers would again see reasonable returns. In the meantime I wouldn't cry too much for asset rich people on the whole- in most cases their assets all round the world have climbed in nominal value well ahead of inflation the last few years.
Crucial paying of rates to BANKS and Councils, is essential.
Otherwise you might all come a cropper.
Like this poor lady.
And of course a bit of bad judgement, helps, it could only happen in America.
Yeah ..Right!!.??
http://newtown-pa.patch.com/groups/trending-in-america/p/woman-loses-ho…
Check what it sold for, check what it was possibly worth. Check the default amount.
Check the difference.??
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