By Roger J Kerr
Given the amount of market, political and media pressure on the RBNZ it appears inevitable that they will oblige with a 0.50% cut in the OCR to 2.50% this Thursday.
Not that such external pressure should ever influence the independent managers of monetary policy.
However, these are extraordinary times for the NZ economy in having to deal with a massive natural disaster as the Christchurch earthquake. Mr Bollard will deliver to the expectations as not to do so would be uncharitable with no upside for the RBNZ.
In terms of the outlook for, and the control on inflation, that is correctly taking a back-seat currently as the nation needs everything it can to lift confidence and hope.
I would not expect a great deal of reaction by the interest rate market to the reduction in official rates. The one-year swap rates pricing at 2.87% already tells us that the market expects 90-day bank bill rates to average well below 3.00% over the next 12 months.
What happens after that is the $50 million dollar question.
What will be of most interest to the markets is the RBNZ’s official view of the economy during the earthquake affected 2011 and potentially booming growth in 2012 (if export commodity prices hold their gains).
The RBNZ would have been very busy re-writing the Monetary Policy Statement after the 22 February quake. Forecasting the initial negative impact on the economy from the disruption to business and retailing will be hard enough, forecasting the influence of the re-insured re-build in 2012 and beyond will be even harder.
The Treasury estimate that the quake will reduce GDP growth this year by 1.50% (that is, now forecasting +1.50% growth, down from 3.00%).
Private sector 2011 GDP growth forecasts vary from 0.0% to +2.00% - I would tend to agree with the Treasury’s +1.50%.
My mates in the shipping/freight industry tell me they cannot currently get enough 'boxes' (shipping containers) to meet the increased export volumes in dairy, apples, squash, logs etc. Only lamb volumes are down this export season due to lower sheep numbers and Southland storms.
The heartland export trade is a big part of the economy and continues almost unabated.
Unfortunately overseas tourism bookings are taking a knock as poorly informed tourists think the whole country looks like the parts of Christchurch and cancel their trip.
As the economy starts to lift again towards the end of this year, the RBNZ will bring back on the agenda how they will return monetary conditions to "normal and neutral" - that is, appropriate settings for an economy growing at +3.0% to +4.0%.
It has been a tough period for the RBNZ managers as they "looked through" last year’s GST/ETS one-off price increases, factor in the earthquake and then decide how much they look through current food and energy price increases. Provided the economy behaves as I expect through 2011 and 2012, at some point the RBNZ will be ramping up the OCR rather rapidly from 2.50% to 4.50%/5.00%.
Once the moneymarkets and swap market get past the current earthquake shock, they will start to build into the yield curve the timing and extent of that inevitable adjustment from "loose" to "neutral" monetary policy.
Borrowers should anticipate that one to five year swap rates will not move any lower; however it will be many months before they start to reflect a more buoyant 2012 economy and move up.
A continuation of stronger US economic data has seen their unemployment rate reduce to 8.90%. US 10-year Treasury Bond yields have moved marginally downwards on safe-haven buying from the volatile Middle-East situation, however stronger US economic growth with associated inflation risks must push bond yields higher to 4.00% in the medium term.
Local borrowers seeking to reduce fixed rates on existing swaps need to be patient and wait for the long-end to increase in yield before shortening seven to ten year swaps to earlier maturities.
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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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