Roger J Kerr says higher interest rates could be expected if we get a Labour-Greens-led government

By Roger J Kerr

The economic case for higher US short-term and long-term interest rates was perversely reinforced by the latest US employment numbers released on Friday for the month of September.

Whilst 30,000 fewer jobs was the result for the month that was badly hit by adverse weather events in southern US, the overall unemployment rate reduced to 4.2%, the lowest level since 2001.

Wages also increased and this is the sort of evidence the Federal Reserve have been expecting and it is why they have stuck to further interest rate hikes this year and next year, despite the markets’ contrary view for most of 2017.

The Fed are correct and the US interest rate market has been wrong all along in my view.

US 10-year Treasury bond yields increased again to 2.36% following Friday’s jobs data and further increases seem likely as stronger US economic data sways the markets to re-price the previous pessimism.

The implications for the New Zealand interest rate yield curve are clear, higher longer-term rates driven by US increases and our short-term interest rates remain stable until the RBNZ are convinced that higher inflation is back on the cards.

Currently the RBNZ do not forecast annual inflation to get back above 2.00% until sometime in 2019.

If the political outcome over the next few weeks is a change of Government to a Labour/Greens/NZ First combination one would have to expect inflation to be on the increase a lot earlier than 2019.

Firstly the expected lower exchange rate to a TWI in the low 70’s (currently 74.7) would have the RBNZ forecasters hastily revising their tradable inflation numbers higher.

Policies artificially curtailing immigration inflows would reduce the labour supply in the economy, sending wages and thus consumer prices higher as well.

Weaker fiscal policies from a more left-leaning Government would reverse large budget surpluses to deficits, which in turn adversely impacts New Zealand bond’s risk premium to US bonds i.e. a higher margin.

Borrowers and investors should expect both short-term and long-term interest rates to be higher earlier under a scenario that Winston goes with the Labour/Greens block.

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Roger J Kerr contracts to PwC in the treasury advisory area. 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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22 Comments

Let's hope so...

The Fed are correct and the US interest rate market has been wrong all along in my view.

LOL- the US interest rate market is never wrong - the collective market maker price is all there is.

Exactly. If the Fed were 'correct' they'd be racing ahead of the curve. Instead they're moving at whatever pace the current precarious rate of inflation will allow.

I would posit that deflationary forces in the rest of the developed world still have the upper hand , and that this will keep inflation in check .

Given that we are an open economy , we have likely imported some of that deflation as can be seen in the low prices for electronics , white goods , clothing and shoes , as well as petrol and diesel , and many imports such as imported foodstuffs and luxury goods , etc

So I would argue that we are not likely to see inflation until the rest of the world economy sees fuller employment and strong demand for manufactures .

I could be wrong , and don't have ready empirical evidence to support this view , but its clear that the big spending consumer economies of the US ,EU and Japan are still in a deflation -type cycle with high unemployment and a lot of spare capacity

"we are not likely to see inflation until the rest of the world economy sees fuller employment and strong demand for .."

And for that I think we might be waiting a while.

read, for ever.

If the political outcome over the next few weeks is a change of Government to a Labour/Greens/NZ First combination one would have to expect inflation to be on the increase a lot earlier than 2019.

Global capitalism transformed into crony capitalism many decades ago, which in effect is bipartisan socialism for the rich.

Another burst (“tech”) Bubble and only more histrionic deflation fears. It was a bogey man, powerfully conjuring images of the Great Depression. The establishment brought in Dr. Ben Bernanke in 2002, replete with an inflationist doctrine that in most backdrops would have been designated the fringe of lunatic fringe. When it came time to replace Alan Greenspan, I argued “Anyone but Bernanke!” It was astonishing how the establishment – and conventional thinking more generally – had so readily adopted inflationist doctrine.

Sure, it was all seductive; but not even token pushback? The New Age Wall Street “money” machine – backstopped by the Fed, the GSEs and the Treasury - had transfixed the rich, the powerful and the levers of power in Washington. The seeds to our nation’s drift toward socialism – and the counterrevolution that brought Donald Trump to the Whitehouse – were neglectfully scattered by Greenspan and then aggressively fertilized by “helicopter Ben.” Read more

You can look at all the indicators , figure out what should happen, then good old supply and demand overrides it all.

It's going to be a hard road to get inflation back. However when inflation turns up at a much higher rate then interest rate pressure will go on. I'm not holding my breath.

If a Labour/Green/NZ First Govt emerges and implements their pre election spending promises of $35 Billion then we will enjoy either more debt, more taxes or more broken promises none of which bode well for a happy electorate. On the positive side the likely drop in confidence locally and internationally will probably depreciate the NZ$ which should improve our export competitiveness and tourism so our trade balance should improve and possibly mitigate the spending blowout and credit rating downgrade.

on the contrary a spending bonanza will go down very well in the electorate.
Its late in the day, time to max up on the house.

NZ is quite lowly taxed by OECD standards.
There's room for higher taxation (within reason) to make the necessary investment into the country's future.

This opinion is either a bit unbalanced, or biased.
Whilst he is right that there would be some inflationary elements to a Labour govt, there would be some counter-inflationary influences too. Just one of several potential examples: reducing immigration and building more homes, all things being equal, should help pull back rent increases.

I would assume that overseas investors would think that as a left Govn is more risky they would demand a higher interest rate. The problem though still remains if I only have $100 in my wallet then increased payments of interest means less spending somewhere else so deflation in that area/sector net change zero. Ignoring that the area/sector can survive this of course.

In the end this is yet another groundhog day post, ie if joe and jane public have no more income they cant spend anymore so no inflation, its really that simple.

Not sure the arrival of Amazon is going to be inflationary.

Thanks Fritz you can pay my share of any increase in taxes. Lets get real and run this country properly without taking more off people to be spent on the whims of a few

Well said Henry , I firmly believe that only the very minimum should be taken away from workers in the form of taxation . .

Capital expenditure should be financed through borrowings by issuing 20 year development bonds at these very low rates, and the bloated public service should be reduced .

We know that small Government and minimum Government interferance leads to the best outcomes

You are taking the mick right?

@steven . just being deliberately controversial , as usual .

I enjoy provoking a response

What I do believe is that Government has a responsibility to help those who are unable to help themselves , such as homeless people , low wage earners , solo parents , the poor and vulnerable .

I dont believe that Government should do for people what they are capable and able to do for themselves .

I do think that everyone is entitled to a fair go , and everyone should be treated equally in terms of access to education, healthcare , opportunity , the law , access the food and shelter , taxation and any other sphere of human life .

And lets face it New Zealand is a pretty fair place on the elements cited above

The income tax rates for individuals are fair and equitable right now , and I also think that all forms of income be treated equally .

The stoush around CGT is built on resentment and envy , and its unlikely to generate much in tax . Its is also a major shift in the whole tax system and has serious ramifications in the long run because investors use property to build nest eggs and provide for their retirement ( and provide rental stock which the State is unable to provide )

Many Kiwis would like to see the tax on their wages reduced. The problem is, other people are making money tax-free and are stridently against that money-making paying its share.

Also I think there are enough kiwis who expect/want to be in the position of the ppl making money tax free that they wont shutdown that "opportunity" for themselves willingly.

ACTS continued 0.5% on election day should tell you just how much a minority view you have.