Roger J Kerr says the risk of medium to long term rates increasing is dependent upon US bond market movements, not the RBNZ or the NZ economy or our inflation

By Roger J Kerr

Some key 'take-outs' for those with interest rate risks from last week’s RBNZ Monetary Policy Statement and associated media conference:

- The New Zealand economy is far from dead (note forecasts of +3.5% GDP growth rates) and thus future inflation risks are also therefore far from dead.

- The current level of the OCR at 3.50% is "still expansionary", thus given the already robust growth outlook it is difficult to sustain an argument that a lower OCR is needed to help the economy deliver some growth. So bad news for the deflation doomsayers who were calling for OCR cuts last week.

- The RBNZ is appropriately "looking through" the plunge in oil prices and therefore is not basing its monetary policy settings off the very low current annual inflation rate (even though it is below the 1.00% bottom limit of the target range), however their job is to look forward at future expected economic and inflation conditions i.e. 12 to 18 month ahead.

- The RBNZ does however examine the second-round price changes emanating from the lower oil prices i.e. air-fares, freight charges  - "The most critical thing, how does wage and price setting behaviour change in response to lower oil prices?"

- "Positive output gap, strong employment growth, record migration trends and record labour market participation" - does not sound like an economy that requires lower interest rates and/or a lower currency value to get ahead.

- In respect to the official RBNZ 90-day interest rate track over the next two years, it needs to be remembered that it is not their forecast, but just the output from their model that is required to push inflation back to the target midpoint (i.e. they have little belief that the flat outrun will actually take place).

- The new norm for "neutral" monetary policy settings in New Zealand is now confirmed at an OCR of 4.5%.

While the risk of increases in short-term interest rates remains benign for the meantime, the risk of medium to long term rates increasing is dependent upon the US bond market movements, not the RBNZ or the NZ economy/inflation.

Roger J Kerr is a partner at PwC. 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