Roger J Kerr says most exporters have adapted to the higher exchange rate and he has no time for the 'bring-back-subsidies' business groups. Your view?

 By Roger J Kerr

A salutary lesson for the economic doomsayers last week, as the RBNZ Governor Graeme Wheeler delivered a forward view on the economy that was more positive and upbeat than what most had been expecting.

Basically, the new Governor completely hosed-down any expectations of an interest rate cut or other unorthodox monetary measures to help the economy that have been called for by left leaning politicians, some “bring back subsidies” (and misguided) business groups and mostly Wellington-centric economists.

Quite rightly, the Governor painted a picture of an economy that is growing, despite global uncertainties, and with that comes associated inflation risks.

While some industry sectors are struggling with the continuing strength of the NZ dollar, the reality again is that on a relative scale we are out-performing most others and therefore it cannot be too surprising that our currency is a strong one.

Most of our export industries have adapted their business models to a 0.8000 exchange rate as being the new norm in any case.

The take-out from the RBNZ statement is that they will not seriously consider adjusting the OCR upwards while the exchange rate is where it is and credit growth is not exactly racing away.

However, should the NZ dollar depreciate materially over coming months for reasons coming from offshore (stronger USD/weaker AUD) the RBNZ inflation forecasts will have to be revised upwards.

If that potential currency scenario coincides with much stronger credit growth due to a frothy housing market, short-term interest rates could be increasing a lot earlier than the 2014 most expect.

The other major development in interest rate markets (as Governor Wheeler alluded to) is the continuing reduction in the credit spread or margin the banks are paying for their funding in international debt capital markets.

While the latest falls in bank credit spreads only provides benefit on their marginal cost of funds, their three-year average cost of funds is now levelling off and no longer increasing (see chart below).

Local banks have also reduced retail and wholesale deposits rates in the domestic market as well, as they do not want any more high cost funds onto their balance sheets that have been pre-funded for most of this year.

Corporate borrowers who are being told by their bank lenders that their borrowing margins have to increase due to increases in the banks’ own funding costs may wish to put this chart in front of their friendly bankers.

Home mortgage borrowers are seeing the benefits already of lower cost of funds to the banks with the intense competition in the fixed rate market driving lending rates down.


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Roger J Kerr is a partner at PwC. 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

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