By Roger J Kerr
The moneymarkets will be focusing on retail, housing, manufacturing and GDP growth data releases this week and the CPI for the June quarter being released next Monday.
All the figures should confirm why the RBNZ is right to be concerned about future inflationary pressures building up in the economy.
Last week’s NZIER QSBO business confidence results confirmed that the economy is tracking on a stronger note this year than what most have been expecting. The capacity utilisation percentage did not increase due to the Christchurch earthquake distorting the data.
Overall the view still has to be that the weight of reinsurance funds and the lack of mortgage interest rate fixing are artificially holding market interest rates down.
Within a few months those factors will have evaporated and one to three year swap rates set to increase very sharply.
The NZ dollar foreign exchange market is already pricing in interest rate increases as inevitable from December onwards.
Those investors and borrowers who still think that the NZ economy is flat and struggling in 2011, thus there is no hurry to make interest rate decisions are misreading things completely. There is growing evidence that increased rural incomes and improving house prices in Auckland are lifting consumer spending already. If the exchange rate was not so high and the earthquake complicating matters, Alan Bollard would have been increasing official interest rates by now.
The chart below of forward 90-day rates illustrates just how far below RBNZ and our forecasts the market is currently pricing 90-day rates for December 2012.
* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. This column was written before the Monday quake. More commentary and useful information on fixed interest investing can be found at rogeradvice.com