By Roger J Kerr
The chitter chatter in moneymarket/economist circles is once again that the probability of the RBNZ cutting the OCR interest rate has increased again.
The arguments are that the Aussies have moved from monetary policy “neutral” just a few short weeks ago to a firmly easing bias with one cut already made and the markets there pricing-in another 0.90% of cuts over the next 12 months.
Whatever the Aussies do, we need to follow, right?
I don’t think so.
It has to be remembered that the Aussies increased interest rates in 2010/2011 whereas we remained unchanged at the 2.50% OCR. They are just now returning to 2009 levels as the RBA belatedly recognise the impact of a slowing China and thus the mining boom changing shape.
I doubt that the new RBNZ Governor will be blindly following his Aussie counterparts.
Current forward interest rate pricing here is for one 0.25% cut sometime between March and September next year. It is not clear whether that pricing is based on the Aussie’s lead, very low annual inflation or the political protests on exchange rate policy have some believing that someone will force the new Governor to cut.
The case for cutting rates would be stronger if the economy was faltering badly and GDP growth was closer to 0.0% each quarter rather than the +0.8% per quarter we are averaging this year.
However, having said that, there are a number of good reasons why the economy will not maintain its relatively impressive growth we have witnessed over the last six months:
- The probability of weather conditions repeating what they did last summer to produce the extraordinary growing conditions is low and thus agriculture production will struggle to be as high as this season just ended.
- The prolonged period of the NZD/USD exchange rate above 0.8000 has hindered output, investment and jobs in some export sectors that don’t hedge forward their currency risk.
- Our largest trading partner, Australia has slowed up dramatically with their consumers playing it much more cautiously now.
- Confidence amongst farmers has declined to three-year lows, therefore rural spending will be taking a breather as well.
Stronger domestic activity in housing and retail in the cities may off-set some of the above negatives for growth, however unless the currency comes back soon, we are in for more subdued economic expansion over the next 12 months.
Therefore, inflation risks subside somewhat, but not enough to justify a cut of interest rates.
If tomorrow’s annual CPI inflation rate is below 1.0% for the year to 30 September it would be poor monetary policy management to cut rates in response.
Setting of monetary conditions is much more forward looking and based on a 12 to 18 month forecast of the economy and thus future inflation rate.
Non-tradable inflation continues to run at a too high a level in New Zealand to take the risk that non-tradable inflation will always be low (due to the high NZ dollar value) to offset.
For these reasons, Dr Graham Wheeler will not be entertaining an interest rate cut anytime soon.
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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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