By Roger J Kerr
The local domestic moneymarkets seem to be looking for the negatives in economic data releases these days and ignoring any positive data that would suggest the economy is on track for reasonably strong GDP growth next year.
While the weaker employment, immigration and housing data has been cited as the reasons behind the economic recovery stalling, the reality is that the record high export commodity prices and terms of trade suggest a strong economic performance.
The local interest rate market has become overly-pessimistic in my view and therefore these lower two and three year swap rates will not last for long.
Retail sales and rural confidence survey data released last week paint a more positive picture of the economy; one that I think will prevail.
If the interest rate markets and bank economists are now looking for the 15 September RBNZ Monetary Policy Statement to be a dovish piece of work, I reckon they will be sorely disappointed.
The RBNZ may well lower their 2010 GDP growth forecast, which at +3.5% was far too high in the first place, however I do not expect them to adjust their 2011 growth forecast down from their current +3.5%.
Therefore there is no justification for the RBNZ to stop their progressive increase of the OCR at 3.25% or 3.5%.
It would be very surprising if the RBNZ stopped the removal of the 2009 monetary stimulus at 3.50%, it would be a major reversal in view by Mr Bollard and he is not prone to doing that.
The RBNZ are still on-track to increase the OCR to 4.50% over the next six to nine months.
It is doubtful whether the moneymarkets will persuade the RBNZ to stop the OCR increases at 3.25% or 3.50%. The RBNZ will be very careful not to make another monetary policy mistake by holding conditions too loose for too long, following their error in holding monetary conditions too tight for too long in 2007 and thus causing the economic recession of 2008/2009.
Borrowers must continue to take advantage of these artificially low market swaps rates while they last.
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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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