News and Opinion, sponsored by RaboPlus

By Roger J Kerr

It appears to me that there is more to the recent rally downwards in two to five year wholesale swap interest rates than the market just re-assessing and recalibrating of when the RBNZ will lift the OCR this year.

Since early January the three-year swap interest rate has declined from 5.15% to 4.50%.

The extent of this pull-back is telling us that more market participants (large investors and borrowers; not the banks as they are mere intermediaries) are perhaps buying into our view that there will be a paradigm shift downwards in the RBNZ “monetary policy neutral” interest rate from 6.50% to 5.00%.

The comment about the banks being mere intermediaries is not strictly accurate however – these days they are large buyers and holders of liquid securities (e.g. NZ Government Bonds) as they comply with new RBNZ funding ratio regulations.

What this also tells you is that the banks are doing very little new household and business lending; the cash is just piling up on their balance sheets.

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Reserve Bank Governor Alan Bollard has defended the bank’s performance through the financial crisis and its use of inflation targeting as its main monetary policy tool, but has said he welcomes reforms to taxation of property to rebalance the economy.

Bollard responded in detail to critics, including Opposition Leader Phil Goff, in a speech to the Canterbury Employers’ Chamber of Commerce in Christchurch. (Update 4 includes links to Economic Weather Report video)

See an Economic Weather Report on Bollard’s speech here on our video page.

Watch video on Youtube here.

Bollard said inflation targeting had stabilised inflation since its introduction with the Reserve Bank Act of 1989, although there remained other macroeconomic imbalances that needed to be addressed with tax reforms to the property investment sector.

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By Roger J Kerr

As the year draws to a close and you are wondering what you may be contemplating over a Christmas drink or three, try putting together the interest rate/inflation/economic growth puzzle for 2010 by considering the following questions:-

Q1:  How consistent is the RBNZ in its economic outlook from one statement to the next?
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By Infometrics economist Matthew Nolan

In a recent speech to Federated Farmers, Phil Goff briefly mentioned that the monetary policy consensus between the two main parties was over. Such a statement is at best a mistaken way of mentioning policy differences and at worst a commitment by the Labour Party to damage the New Zealand economy.

Don’t get me wrong, there are issues in the economy that are a concern (eg housing bubbles). However, these are not the issues that the Labour party is dealing with by ending the monetary policy consensus.

At its heart, the consensus between the two main parties was to do with the target of monetary policy – monetary policy must be implemented by an independent Reserve Bank to ensure that inflation remains within a low and narrow band.

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By Roger J Kerr

Sideways for swap rates

The intensity and heat in the wholesale NZ interest rate market continues to reduce as the high expectations (certainly not ours!) of only a few weeks ago that the RBNZ would be following the RBA to higher official rates early in the New Year is completely re-assessed.

A dose of reality in the domestic economy of rising unemployment, static incomes, debt arrears/defaults and job insecurity has finally persuaded the “tighten monetary policy” brigade that their reading of the economy was way off beam.

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Watch video on YouTube here.

Watch video on our video page here.

Bernard Hickey delivers a special report on Labour’s decision to abandon 20 years of political consensus on monetary policy and start a debate on other ways to manage interest rates, exchange rates and the economy.

Labour leader Phil Goff isn’t suggesting any hard solutions yet but Prime Minister John Key has already brushed aside the attempt to have a debate about monetary policy, saying Labour just wants higher taxes. But there should be a debate as the current setup doesn’t appear to be working for exporters who face a higher currency whenever the OCR is lifted to cool down the housing market.

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