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By Bernard Hickey in Wellington

Watch Bernard Hickey deliver a report on YouTube here

Watch RBNZ Governor Dr Alan Bollard talk about the economy, interest rates and the housing market.

The Reserve Bank has left the Official Cash Rate (OCR) on hold at 2.5% and has repeated that it won’t be increasing the OCR until the “middle of 2010”. The Reserve Bank is scheduled to make OCR announcements on June 10 and July 29. The OCR has been on hold since April 30 last year.

Governor Alan Bollard said the economy was recovering broadly as expected and growth was expected to pick-up further through 2010. However, consumer spending and business investment was more subdued than in previous recoveries as indebted households and corporate increased saving and reduced debt, he said.

Some concern about decisions on property taxation in the May 20 budget budget also appeared to have slowed activity in the market for existing homes, the Reserve Bank said. It forecast stagnant real house prices over the next couple of years.

The Reserve Bank also pointed in its Monetary Policy Statement to likely one-off increases in prices later this year to come from increases in ACC levies and the Emissions Trading Scheme (ETS). It did not refer to an expected GST increase to 15% from 12.5%, but said it would “look through” the impact of the ETS as long as it did not change inflation expectations.

Here is the rest of the Governor’s statement below.

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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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By Roger J Kerr

Market swap interest rates have rallied lower over recent weeks, reflecting the belated re-assessment by the markets about the timing of OCR increases in 2010 from the RBNZ.

Swap yields may struggle to move a great deal lower from here, but do not expect any lift up for several months either.

The market outlook therefore appears very stable over coming months. Therefore, we have some time available to think about wider relationships between economic growth, inflation and short-term interest rates.

These two charts below support the view that 90-day interest rates may not travel much above 5.00% over coming years:-
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By Roger J Kerr

Forward pricing of 90-day interest rates and term swaps rates continues to decline in the marketplace as the realisation sinks in that the economic recovery this year will be slow and bumpy, allowing the RBNZ to take their time in respect to when they start lifting the OCR.

The RBNZ have the luxury of time to wait and observe the economic developments through the first half of 2010 because the NZD/USD exchange rate still remains relatively high (and monetary policy tighter because of this) and banks are paying mile above the OCR for retail deposits, thus actual market interest rates are much higher than the official OCR and BKBM rate settings.

Another good reason why the RBNZ are relaxed about the domestic economy and inflationary risks is that credit growth remains very subdued.

They were starting to be worried late last year when the housing market picked-up, however that has fallen away again and credit growth remains very low.

Given weaker employment, retail and housing data since the early December Monetary Policy Statement, the RBNZ have even more reasons to revert to their dovish tome of their October MPS on the economic forward look and reverse some of their more hawkish (and unnecessary) comments in the December MPS.

If the next Monetary Policy Statement on 11 March reverts to a more dovish tone as we expect, market interest rates could come off another 20 to 30 basis points.
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By Roger J Kerr

The Kiwi dollar has bounced back up again from lows of 0.6820 on two occasions over the past two weeks. On both occasions the short-term NZD buying was unrelated to any positive economic of financial news coming out of the local market.

As with the price movements late in 2009 when two and three cent swings over the course of 48 hours trading on the international FX markets were the norm, the Kiwi dollar has continued the daily volatility this year with unpredictable and sudden jerky movements both up and down.

What has become evident is that global currency speculators who use to play in the NZ dollar market are no longer so prominent and international investor interest is much reduced.

The Australian dollar with higher interest rates and a much more vibrant economy looks far more attractive.

Unfortunately for local exporters hoping for further NZD depreciation as the USD strengthens globally, positive news out of Australia that drives the AUD upwards, also spills over into short-term NZD buying.

Stronger employment figures in Australia last week contrasted starkly against weaker NZ employment numbers for the December quarter. The Australian figures lifted the AUD and were a major factor in lifting the Kiwi off from 0.6820 and back up again.

The Kiwi now appears to have major resistance from trading above 0.7000, with speculators and investors not prepared to build new net long NZD positions above 0.7000.

The NZD/AUD cross-rate has remained relatively stable between 0.7850 and 0.8000 throughout the last three of four months, indicating just how closely the NZD/USD rate is tracking the AUD/USD exchange rate on a daily basis.

Whilst the AUD/USD rate remains the dominant force over the NZD/USD direction in the short-term , other medium-term NZD currency drivers such as commodity prices, interest rate differentials, relative economic performance and the direction of the USD against the Euro, all suggest a continuation of the NZD downtrend against the USD to 0.6500 and below. (more…)

By Roger J Kerr

For many years the RBNZ has regarded 90-day interest rates between 6.00% and 6.50% as “neutral” for monetary policy settings.

Interest rates 2.00% below there were seen as a “loose” monetary stance and 2.00% above as “tight”.

The global credit crunch, banking crisis and resultant GFC in 2007 to 2009 has changed that paradigm permanently in my view.

It may be a little premature to make this call, however the evidence is gathering that the new “neutral” for monetary policy setting in New Zealand is 90-day interest rates at 5.00%.

I do not see wholesale 90-day rates moving much above 5.00% over the next two years, unless the economy takes off to 5% GDP growth rates and inflation risks go up with the booming economy. It is very hard to see this scenario happening in the current environment.

The three major factors that support this paradigm shift are as follows:- (more…)