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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4 Comments
I dont think farmers are going to spend for a while, look at IBM
http://market-ticker.org/akcs-www?post=170341
Why is it stupid? Because a buyback says two things:
- Our stock is trading historically cheap to value.
-
We can't find anything we can spend our corporate cash on that will grow the business prospects - that is, we are unable to find a way to expand sales with our money in a fashion that will return at least the margin that we earn now.
That latter statement is not good.
I do not really see ortgage free farmers splashing out now they are worth half what they thought they were - they will need more time and better things before they will even think about opening the wallets - unless it's for the buy the crafar farm next door etc...
Isnt it strange that no matter what the RBNZ thinks or does (or Government) it is always going make make things turn to crap or at least wrong....
Yet NZ compared with much of the rest of the world is doing OK, shakey at times , but ok.
Im not saying the Gov or RBNZ are right, or right most of the time....just posing an objective observation.
Prudential supervision issues
Housing bubbles can be very costly. In Finland, the bursting of the housing bubble in the early 1990s led to a decline of GDP by more than 10% and in Sweden by nearly 5%, even though they eased monetary policy a lot and fiscal policy absorbed part of the shock (Eschenbach and Schuknecht, 2002).11
(Note11). In Finland, most of the credit losses came from corporate loans, while credit losses from housing loans were small. But households reacted to excess indebtedness and declining collateral values by accelerating the pay-back of loans, resulting in a rise in the saving ratio. This reduced domestic demand and increased the number of bankruptcies in the non-tradeable sector and thereby the credit losses of banks. The total costs of the banking crisis are estimated at 8 to 10% of GDP. The government provided the banks with around € 16 billion. The net cost to the government was half of this amount (OECD, 2006b). NOTE from PhilBest: that note on the after-effects in Finland is incredibly important. If households stay solvent and pay down their debt, the economy and the banking sector is going to be in trouble anyway. If households don't stay solvent and pay off their debt, the economy and the banking sector is going to be in trouble. Moral of the story for governments: don't EVER let a property price bubble occur in the first place.....! The report also has something to say about how property price bubbles DO happen, especially relevant is the section headed "zoning regulations". I am becoming increasingly angered as I have discovered volumes of sensible analysis that have been wilfully ignored by policy makers hell-bent on achieving certain urban outcomes regardless of consequences.
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