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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11 Comments
Like HELL HE WAS! He did not move the OCR bugger all from 2001-2005 and only reluctantly moved it in .25% points after that at an appallingly slow rate. He then lower it as quick as he possibly could trying not to burst his OWN property bubble. Get your FACTS straight
IF, nothing melts down Roger I tend to agree, but where I disagree is i expect a melt down. I think it highly likely we are going into a full blown Depression (90%sure v 10% no)....so the RB will have to reverse its rises probably next year.
Oh and research peak oil....make sure its effects are in your calculation for the next 30 years.
regards
I wouldn't be surprised if he paused either this meeting or next. His last statement was definatly more doveish. Infact I would be surprised if he didn't pause, mind you it wouldn't be the first time. Clearly many of us are being too pesimistic according to Bollard and Kerr. CPI numbers will be interesting.
It's such a delicate balancing act isn't it? I agree that savers should be rewarded with decent interest rates, but crank the OCR up too much and you'll have shops closing, businesses going bust etc which isn't desirable either. And fair call, the only reason the latter will happen is because a lot of Kiwis have too much mortgage debt (because credit was so easy to obtain and most thought house prices would steadily increase forever) and increases in their mortgage repayments is just going to squeeze household budgets. Most will cut back on "shopping" before they'll sell their house (especially if the sale results in negative equity) so retailers and the like will feel the squeeze as well.
I'm not an expert in this field, but I wonder where the "perfect equilibrium" sits in this current economic climate - as in the tipping point where the OCR is increased so much that the damage it does outweighs the good it does?
Despite Bollard's primary responsibility to use monetary to keep inflation within a prescribed band, I don't see any downside in him keeping rates lower for longer.
Based on the view that the economy is recovering; if Bollard keeps the OCR arguably lower than he should, inflation will exceed target - however the NZ economy grows, unemployment reduces, wages increase, election year 2011... I dont think anyone will be too angry at him for this.
Particularly compared to opposite scenario.
It is interesting to see how the Reserve manages the exchange rate, of course the rate diferential with Australia should get narrower so that NZ can compete for the carry trades. I also think that Australia is done with interest rates considering that a 4.5% gives the RBA room to manouver. An extra 25 or 50 bpts will endanger the housing sector and take Australia banks near a cliff. The RBNZ should keep hiking until it reaches a comfort level because the biggest world economies are too jumpy and if the colapse everybody is talking about ever hapens then those extra rates will be the first tool that the RBNZ will have to stimulate the economy and avoid a crash Of course Interest Rates are not poular but those who save know how good they are because they encourage saving... In low rate environments people spend beyond their means and I totaly disagree with that.
The main driver of high inflation is China because their montary sistem allows them to sell with a competitive edge that puts you in a Deflationary / inflationary environment unless you devalue your currency. So if your trading partner is China you are in for deflation. But that is only one part of the ecuation because the goods and services produced in the country will grow increasingly expensive... that is the Chinese trap. The USA fell in that trap and it litaraly killed their industry, if you went to Wal Mart or Martha Steward in 2008 the only thing Made in the USA where the cashiers. The Chinese drain a country's capital till there is nothing and then they go after the next "trading partner"... The British Empire sufered the Chinese too.
Those countries that do not have Manufactured goods are the only ones that rely beneffit from trading with the Chinese. Give them the commodities and get finished products.
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