By Roger J Kerr
Potentially two counter-acting forces evolving this week will not help settle the debate as to whether the RBNZ need to lift the OCR in late 2012 or early 2013.
The debate is not only about the timing of OCR adjustments, however the speed and extent of those increases.
Stronger GDP growth that brings higher inflation risks with it would point to earlier and more rapid increases. Much also depends on where the NZD/USD exchange rate is.
Should the NZD/USD rate stay above 0.8000 and the TWI Index stay up near 74 over coming months, the RBNZ have monetary conditions being tightened for them automatically by the exchange rate and thus will not change interest rates.
The two variables this week are the NZ inflation numbers for the March quarter on Thursday 19th and RBA meeting minutes tomorrow, Tuesday 17th.
Rightly or wrongly, our short-term swap rates do follow Australian swap rates and the Aussie interest rates have fallen as they anticipate more RBA rate cuts. The RBA are waiting to make sure there are no surprises in their inflation figures on 24th April before cutting rates; however their moneymarkets are pricing-in 0.90% in cuts by December from the current 4.25% OCR. The meeting minutes should confirm the abrupt change in attitude at the RBA over recent weeks.
The RBNZ still appears to be too relaxed and/or complacent about our inflation outlook.
Whether we see all the recent price increases occurring in the economy coming though in the March quarter’s numbers remains to be seen. I would not expect any surprises away from the +0.6%/+0.7% prior forecasts for the quarter.
Looking ahead, on top of all the electricity, fuel, insurance, food and beer price increases going on, there are two new developments that are also causing higher inflation:
- Construction prices have to lift as an under-resourced building industry struggles to match the sudden lift in demand from the Christchurch re-build and Auckland under-build.
- The rising NZ dollar last year caused price decreases for imported consumer goods which has partly disguised other price increase in the economy to date. The stabilisation of the NZD/USD rate just above 0.8000 and potential pull-back into the 0.7000’s over coming months means that such price decreases are not going to repeat this year.
Latest residential property price data from REINZ confirms the upward trend now in place and as the chart below indicates, the two-year swap rate has historically followed.
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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
5 Comments
The problem here is the key inflationary indicators, the exchange rate and ChCh rebuild pressure are not really indicators of an over heating economy creating structural inflation.
Exchange rates rise and fall with the mood of the international community and are much too volatile to plan an economic policy around.
ChCh is a narrow circumstance that won't last beyond the insurance money, even though the effect may last for a few years.
If banks manage to drive another real estate speculation and the exchange rate falls we could have the joy of stagflation, rising inflation and falling growth.
Im not sure if what you are saying is profound or silly...LOL....
If you are saying, lets ignore the data...? because you believe there should be inflation due to printing? in which case silly.......we face deflation in the short term with huge loses IMHO.
NB Growth is history.....its now going to be shrinking....
If we however talk about Peak oil and peak raw materials then some costs are going to rise due to the cost to extract rising, so things you have to have eg food will get more expensive......if we have no more money other goods the things you woul dlike to have eg ipods have to drop in value or the vendors cease to be in business, (which is probable).....
What we face is a zero bound / liquidity trap and the real prospect of deflation....for 5 ish years.....maybe 10....once we have bottomed out and start to recover then yes we will see inflationary forces....
regrads
because he's too afraid?.....and he follows the neo-classical school of "economics" which didnt see this mess coming and cant see an exit?
Hence why I critise hims so severely........
If he addressed the possibility of deflation and then say dismissed it in a logical and thoughtful way I could get on with his take on how the world will go...Instead he appears to ignore it, yet he does "risk management" so he isnt......
regards
Agree....though I think its when, once a depression starts I think "wise" money will flee to the USA and our NZD will crash.....however I think the USA is a basket case myself.....I would assume when that happens interest rates will rise, property values will greatly drop and we will see deflation of 10%+ no one will take out a mortgage and it will be very ugly IMHO.
Pray no one flinches seems to be the game at the moment.
regards
So yet more no evidence of inflation....
I think there are a huge raft of factors all bearing or could bear on what happens in the next two years, you only seem to mention some of them to supportr your view...
Its intersting, the graph shows dis-inflation and dropping very consistantly....I make it 0.3% per month.....and we stand at 2.9%.....2.9/0.3 = 10 months more or less to 0%.....and yet you dont even comment on that...even in passing and dismisal thereof. So I guess you are going to be shocked if we get deflation...just shocked....sorry what did you manage again?
Chch, who in their right mind is going to hang about in a dyingcity for 2 or 3 years? businesses and PIs will move on IMHO....so OK Auckland will be the benefactor...and OZ.....
Retail is struggling, Bunnings etc is suffering, DSE ditto....so OK some building pluses in Chch and Auckland, what will happen overall NZ? Cant put up new prices to compensate for labour costs rising so I suspect there will be little new building away from the centres, depressing materials prices overall.....
All else being equal and the external factors are probably far more important....If we see a real meltdown in the EU there will be a rush to safety which will be the USD? so the NZD could fall off a cliff....let alone 0.7....
regards
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