By Roger J Kerr
The economic forecasting houses calling for the RBNZ to cut the OCR are either examining an entirely different economy to what I observe, or they truly believe that New Zealand monetary policy management should blindly follow what the Aussies do.
Never let the facts get in the way of a good headline is one response.
However, the local moneymarkets are also starting to price-in an OCR cut by July as well.
They also seem to be misreading the lie of the economic landscape.
A short history lesson reveals that the Reserve Bank of Australia increased their official interest rates from 2.50% to 4.75% in 2010 after they avoided an economic recession from the GFC and thought they had looming inflationary pressures. The RBNZ left our OCR unchanged through that period as events like the Christchurch earthquake and NZD strength delayed the removal of the emergency March 2009 2.50% OCR levels.
The consequence of the increase in Australian interest rates 18 months ago was to attract global investment funds into the only growing economy in the world that also offered higher yield returns. The net result was a rapidly appreciating AUD currency value that has decimated their non-mining manufacturing sector over the last 12 months.
The RBA have belatedly recognised their monetary policy error and are now hurriedly dropping their interest rates.
The New Zealand situation is completely different with the pickup in the economy due to high agricultural commodity prices occurring in 2011, coming a year after the boom in mining commodity prices that boosted Australia in 2010.
The economists and moneymarkets advocating an OCR decrease either think the NZ economy is headed into recession or that annual inflation is headed to below 1.00%.
Neither seem very likely to me.
The NZ dollar over the last few days has broken below key support levels and appears headed lower.
There are two automatic consequences of the depreciating currency value that render the OCR cut arguments as futile and misplaced, and they are:
- Exporter’s income and profits which were being hurt by the falling commodity prices and sticky NZ dollar above 0.8000, are now much relieved with the falling dollar and thus +3% GDP growth this year still appears more likely than not.
- Prices on imported consumer goods (TV’s, computers, furniture, clothing and sports gear) which have been reducing for 12 months and thus disguising other price increases in the economy, will no longer be falling. Based on a TWI exchange rate value at 70 for the rest of 2012, 6% below its recent average, any inflation forecast has to be well above 2% for the next 12 months. Add on rising prices for electricity, rents, construction, insurance, beer and rates from the non-traded goods sector and it is a recipe for an annual CPI nearer 3%.
The RBNZ would be making a monumental monetary boo-boo if they were to follow the calls for an OCR cut at this time.
Lower mortgage interest rates would also add fuel to the residential property market which is already hotting-up due to a lack of supply of properties in Auckland and Christchurch.
Cutting interest rates at this time would be a policy mistake that would not be a good look for Governor Bollard’s last few months in office.
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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
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