By Roger J Kerr
One would have to expect that the RBNZ will not be as upbeat on the outlook for the NZ economy as we are, when they report with their quarterly Monetary Policy Statement this Thursday.
They will continue to be cautious about risks from Europe and the global economy adversely impacting on the NZ economy.
I repeat my broken record that I just do not see these so-called headwinds for the NZ economy occurring at all this year, and to date the evidence of stronger US and Chinese economic data over recent months is that Europe’s problems are not dragging down the global economy.
No doubt the RBNZ economic forecasters will take the overly-cautious route and forecast a +2.00% GDP growth rate and +2.00% inflation rate for the next 12 months. That would suggest no indication of changing the OCR later this year.
They would be wrong in signalling such a benign growth and inflation outlook and might wake up by May/June time to the fact they have underestimated growth and inflation risks in the economy.
Therefore, all borrowers are well advised to fix before the rush pushes swap rates up further later in the year (swap rates are already rising).
The risk of a global double-dip recession has disappeared, so why would borrowers with a medium to long-term outlook hold back from fixing now at still record low market interest rate levels?
Other areas of interest to reconcile my views to the RBNZ view of things include:
- Do they still hold the bank-economist line that farmers are all still repaying bank debt? The reality is that farmers are now reinvesting big time in their businesses (spending on fertiliser and new equipment) and have moved on from the “de-leveraging” phase.
- Do they continue to ignore the current upwards price pressures on electricity, rates, insurance, beer, petrol, dog licenses (?) and house construction costs?
- Do they continue to ignore the perennial problem of large parts of the NZ economy lacking true market competition and this continues to be the largest risk to inflation we have. As per normal, the RBNZ statement will fail to mention “competition” as the most important component of inflation control.
- Should the RBNZ be as complacent as they appear to be on the now clear pick up in prices and activity in the Auckland residential property market? Latest consents and work put in place data tells us that the long-awaited recovery in the building sector is already underway.
- Increases in bank lending margins due to the banks paying higher credit spreads in international debt markets has already occurred, it is not really a risk of increasing further. Spreads on Aussie bank credit default swaps in Europe and now reducing and local debt issues by ANZ and Rabobank are being snapped up by investors. It would be disappointing to see the RBNZ over-emphasise this credit spread factor as a reason not to raise the OCR from 2.5%.
In a nutshell, what the RBNZ say this Thursday will be different from what they will be forced to admit (in terms of a stronger economy and thus future inflation risks) come their June and September MPS statements.
--------------------
* 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
14 Comments
So lets act like lemmings and fix then....or wait a few months...actually personally a few years....oh the wailing of the inflationistas....."its coming"......"its coming".....4 years on.....no sign yet....globally teh GFC is a slow motion train wreck that is continuing....
"beer" yeah sure and in the USA P&G raised their prices by 8% and lost 7% in sales.....oops.....so we have a less competitive market here, well actually we can swap one good for another or do without, when you wallet is no fatter there is no choice.
regards
Probaly because all savers in NZ wouldn't commit their savings to a 25 year deposit to fund the loan.
So stop blaming the banks for every ill in the world.
Bet you even blame the Banks for the poor summer as bankers have paid Nature off as well.
PS what is the answer to your question because I can't see it or work it out.
Probably Wolly because the average house turns over at something way less than 10 years, and just think about the howls of pain when a home owner suddenly finds he/she with a $200,000 loan has to repay early a fixed rate of say 7.5% when the markets are at say 6.00% for the remaining 23 year term. I can assure you a $70,000 loss on a $200,000 loan would be a massive eye opener for the borrower and a problem for the bank through no fault of it own (other than having been dumb enough to have given a 25 year fixed term loan to a retail borrower).
Fix. Fix. Float. Float. Float. Maybe fix. Maybe fix. No float. No float . Maybe fix.
Float. Fix. Maybe keep floating... Notice fixing was not an option 1980s - 1996 - ish. We didn't have to worry, we just took it - 20.5%, 18%, 14.5%, oh wow a low 11% we were made..
Now we live like the famous David Lange "Reef Fish" darting around paranoically with the global manipulation/s.
I find it hard to believe that anyone can think there is no chance of economic slow down. Most of the western economies have swaped growing private debt for growing government debt and that is becoming increasingly difficult to sustain, look here http://j.mp/zV9dZo and here http://j.mp/zStuye
QE is sustaining the US, Japan, UK, Europe and China. There will be a correction, it must happen. Its critcial to find a way to preserve your capital maybe here? http://j.mp/y0u1S1
Bang on Robo47....the game is finding ways to survive the storm....My $ is on these thieving govts creating inflation to wash away their debts and emerge all smelling of roses and not the brown stuff.
Our mob are destroying the Kiwi$ at 30% a decade...Key thinks it's a solution to the debt mountain...he said so three years ago.
Buy quality land you can grow stuff on close to service and where it's ok to build a residence or tart up what's there. Any young Kiwi would be wise to avoid producing sprogs.
If and for me its a when we go into a depression hard assets such as farms which are massively over-priced in NZ at least will fall a long way IMHO. It may well be in such a scenario that you pick the asset that looses you the least....property is one I think will be hammered the most....Once at the bottom then yes cash = bad.....property probably will be good....
Personally going into a depression and while we see severe deflation the way to bet is cash....or short term Govn bonds maybe, ie 6 months. No corporate bond is worth the paper its written on btw, I think the mom and pop investors who rushed out of the finance company fiasco have gone into company bonds, expect severe haircuts and wailing again...
I dont like gold it earns no income....and the paper IOUs for much of its speculation will be another haircut point......
So the "wisest" investor of all will have a lot of property, corporate bonds and gold....NOT.
regards
I can agree on the bond filth...and maybe the paper gold....short term parasite deposits maybe...but property covers such a wide spread....I'm talking a small holding on top soil..one that is 100% safe from council theft for roads or running sewage pipes through and safe from transpower destruction!
A good bit of land with a house..space to grow most of what you need and then some. Debt free of course.Even better if you have a cray infested reef nearby and hills full of wild game and firewood...
Steven - there has never been a period in recorded history where there has been zero deflation in the world for the 60 years period we're currently in - repeat, zero deflation for 60 years despite many dramas over those years.
Why ? perhaps because since 1971 it has been the only period in history where the entire world is operating on fiat currencies at the same time - fiat currencies with nothing backing them that permits central banks for the past 40 odd years to print more money every time there has been a crisi,s and when there has been concerns at possible deflation.
What you're saying is that central banks are going to change their spots - bull crap - they will print and print and print until it all blows up. When it does, you'll get your deflation, but before that, and it could still be many yearsaway, you're going to get inflation like you haven't seen before.
I repeat what I've said before, think about what's changed in the world in recent time (fiat currencies) before you just assume a depression will result in deflation (talk to the Germans in the 1920's about that), coz if its even just high inflation first, you're wiped out sitting in cash on negative real interest rates, which you must be if you retain your current view.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.