By Roger J Kerr
It is instructive for the outlook of interest rates this year that the market did not aggressively push swap rates lower following the weaker than expected GDP growth numbers last week.
Consensus forecasts prior to the December quarter GDP release were for +0.60% with the risk being that it could have been higher.
The “surprise” factor in the numbers was the sharp run-down in inventory levels, particularly in food processing and livestock slaughter.
Favourable climatic conditions late last year meant that farmers held on to their lambs and beef cattle for longer and delayed sending them to the works.
Net result is a timing variation caused by the fantastic grass growth lowering the GDP number to +0.3%, rather than some fundamental slowdown in the economy.
As we know, manufacturing has picked up strongly over the first three months of 2012. No-one is lowering their 2012 growth forecasts despite the weaker December figures, thus no real change to forward interest rate pricing or swap rates.
The largest factor determining the timing of OCR increases by the RBNZ this year remains the NZD/USD exchange rate level. A Kiwi dollar above 0.8000 all year hurts exporter’s profitability and investment and thus is a monetary tightening mechanism by itself, negating the need to increase interest rates.
Should the Kiwi dollar retreat back further to the mid-0.7000’s region, the adverse impact on the productive export sector is less and it leaves room for Mr Bollard to start the interest rate normalisation process.
Therefore for borrowers and investors at risk to interest rates moving higher or not moving higher later this year (as the case may be), the drivers of the NZD/USD exchange rate being global commodity prices, Chinese economic news and US dollar movements against all currencies is what you should be monitoring to see whether your risk has increased or decreased.
As the RBNZ Governor highlighted in the last Monetary Policy Statement, the value of the NZ dollar is just as important as interest rates and credit in determining monetary conditions in New Zealand, due to the dominance of export industries in overall growth performance and the high level of import penetration.
The old Monetary Conditions Index (“MCI”) is currently +785 - that is, marginally tight monetary conditions - not exactly super loose conditions requiring interest rates to increase. However, a pullback in the NZ dollar would rapidly push the MCI Index negative (loose monetary conditions) and that would not be a comfortable setting for an economy expanding at +3% annual GDP growth with well documented price increases occurring across the economy.
Mr Bollard is hoping for a weaker NZ dollar for the good of the economy; however home mortgage borrowers will be the ones to suffer the most if this occurs over coming months.
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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
2 Comments
This makes no sense...
"Therefore for borrowers and investors at risk to interest rates moving higher or not moving higher later this year (as the case may be), the drivers of the NZD/USD exchange rate being global commodity prices, Chinese economic news and US dollar movements against all currencies is what you should be monitoring to see whether your risk has increased or decreased."
If commodity prices fall or China deteriorates we would be looking at a global slowdown and a significant negative impact on NZ, theres no way Bollard would raise rates against that backdrop.
Bottom line is low rates are here to stay
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