By Alex Tarrant
Treasury is the latest to succumb to a ‘lower for longer’ view of where interest rates are headed, but is still more optimistic than the Reserve Bank on how high the Official Cash Rate will be in four years’ time.
Budget 2012 forecasts showed Treasury expects the 90-day bank bill interest rate to rise from an average 2.7% in the March 2012 quarter to 4.1% in the March 2015 quarter, suggesting an Official Cash rate then of about 3.75%.
In contrast, the Reserve Bank’s latest set of public forecasts released in March show the 90-day rate rising to 3.6% in March 2015, implying an OCR of 3.25%.
The OCR is currently 2.5%. Most bank economists expect the Reserve Bank to resume hikes in the first quarter of 2013.
The 90-day bank bill rate has in fact fallen in recent weeks to just above 2.5%, indicating markets are expecting a 25 basis point cut in the Official Cash Rate to 2.25% by the end of the year.
The 90-day rate is generally 25-30 basis points above the Official Cash Rate.
RBNZ March 2012 Monetary Policy Statement 90-day rate forecasts.
March 2012: 2.8%
March 2013: 3.1%
March 2014: 3.3%
March 2015: 3.6%
Treasury Budget 2012 90-day rate forecasts; (BPS expectations in brackets)
March 2012: 2.7% (2.7%)
March 2013: 2.9% (3.3%)
March 2014: 3.6% (3.7%)
March 2015: 4.1% (4.4%)
March 2016: 4.4% (5.2%)
“The forecasts assume that monetary policy does not tighten to offset the temporary effects of the higher excises on the CPI,” Treasury said.
“However, strengthening demand in the economy and diminishing spare capacity are forecast to lead to a gradual withdrawal of monetary stimulus. The withdrawal of this support is forecast to begin in early 2013,” it said.
However, the pace of tightening was uncertain.
“The pace and extent of interest rate rises are dependent on the strength of the exchange rate, the strength of domestic demand, and conditions in financial markets; a stronger exchange rate would also lead to tighter monetary conditions,” Treasury said.
“Banks continue to find the cost of funds elevated relative to their pre-global financial crisis levels, which is increasing the margin between the Reserve Bank’s Official Cash Rate (OCR) and retail interest rates,” it said.
“These higher costs are assumed to persist over the forecast horizon; international funding markets are expected to improve but to remain impaired; and upward pressure on domestic funding costs is expected as domestic deposit growth slows and credit demand rises.
“Further increases in the cost of funds would, if passed on to borrowers, reduce the extent of increases in the OCR required to meet the Reserve Bank’s medium-term target of inflation between 1% and 3%,” Treasury said.