'Until the world works out where it is going, our interest rates are going nowhere.' Your view?

 By Roger J Kerr

'Take-outs' and 'learnings' from the RBNZ’s monetary policy statement last week may be summarised as follows:

- Governor Bollard himself heavily influenced the first part of the statement which was correctly downbeat due to the uncertainties from the recent global market turmoil. The RBNZ do not know right now how Europe will pan out and what it means for the global economy, therefore there are endless permutations as to what are the likely monetary conditions in six and 12 months time.

- The RBNZ economists had to admit in the second half of the document that the domestic economy had been stronger than they anticipated over the last 12 months. However, similar to most bank economist view’s at this time they see retail, housing and employment continuing to grow based on incomes increasing, in almost blind ignorance at what is happening globally. A number of banks had prior predictions of an upbeat MPS statement, they must operate on a different planet to the rest of us.

- The RBNZ do recognise the 'dampening influence' the high NZ dollar value is having on the export sector and thus the economy. My view is that they continue to underestimate the dominating power of the NZD/USD exchange rate over economic growth in New Zealand. The sustained period above 0.8000 has severely damaged export industry confidence, profits, output and investment. Up until three months ago the rising commodity prices off-set the currency negative, however commodity prices are now falling.

- The RBNZ remain confident that agricultural commodity prices will remain at their high levels. It would be nice to share that confidence (which appears to be courageously based on what Fonterra tell the RBNZ), however current global trends suggest otherwise. Weaker global economic growth than earlier assumed must exert continued downward pressure on all commodity prices. In turn, the speculators in commodity markets will be forced to reverse their long positions.

- The RBNZ have reduced their 2012 GDP growth forecast from +4.00% to +3.00%, however that still looks too high based on a 0.8000 NZD/USD exchange rate continuing. If the Kiwi falls into the mid 0.7000’s they may be right.

- As expected, there was little change to moneymarket forward pricing and yield curve shape as a result of the statement. The RBNZ have lowered their forward TWI and 90-day interest rate assumptions, however it never pays to read too much into these projections (they are not official forecasts).

- Also as expected, sharply higher bank borrowing margins in offshore markets will automatically increase borrowing costs without market base interest rates moving. The banks are not currently borrowing in offshore markets and their lending is not growing, however eventually they will have to refinance (roll-over) maturing offshore debt at higher margins. The high currency value and increased bank margins leave monetary policy settings today arguably tighter than what a revised down growth outlook justifies.

For these reasons Governor Bollard is on indefinite hold with monetary policy.

It is impossible to argue against the RBNZ’s revised monetary policy stance. Until the world works out where it is going, our interest rates are going nowhere.

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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