By Roger J Kerr
The sideways trend continues in the New Zealand interest rate markets and both borrowers and investors can expect this to continue over coming months.
In the meantime the flat domestic economic data supports the RBNZ stance; however monetary policy is not managed on current data. It must be based on the forecast economic conditions in 12-18 months time and the inflation pressures that will come off those future conditions.
My central view continues to be that the RBNZ is still looking too much in the rear-vision mirror on the economy and are not trusting that the stronger export performance (due to the record high export commodity prices) will lift overall GDP growth in the second half of 2011.
The gap between their current view and my outlook is that they do not think the Kiwi consumer will start spending again in the shops anytime soon.
The contrary view is that the large swag of dairy farmers who are not overly indebted to their bank will start to spend again on personal and farm business items.
That uplift in provincial New Zealand will eventually feed into the larger cities by the second half of 2011, just as it has always done before on high export prices.
Two factors will disrupt the stable interest rate environment that the markets see continuing for several months. Stronger than expected Christmas retail spending will support my view of better economic prospects in 2011 and profit-taking in the US Treasury Bond market (yields up) may well cause our long-term rates to increase when most do not expect it.
On top of that, the RBNZ will be forced to revise their 2011 GDP growth forecast upwards by the time of the early December Monetary Policy Statement, as they factor in the Canterbury earthquake re-build (expected to add +0.5% the nationwide GDP growth in 2011).
Local banks are starting to become quite flush with cash as they cannot increase their lending and have worked hard to get in retail deposit monies to comply with the RBNZ Core Funding Ratio.
What this means is that when the RBNZ come to lift the OCR in March they may not make much impact on bank deposit and lending rates as the banks cost of funds is already 4.50% to 5.00% and will not change because the OCR has changed.
If the banks are struggling to lend the money they have on home mortgages and businesses they are highly unlikely to increase their landing interest rates.
Just how desperate the banks are becoming with the lack of credit growth can be seen with several changing their mortgage lending criteria from 20% deposit to 10% deposit required.
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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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