By Roger J Kerr
A test of success for any central bank chief is whether they pontificate on the big decisions that have to be made or whether they are bold and decisive.
My take on Governor Wheeler is that he will be decisive when the time comes to increase the OCR and he will have a reasonable handle on how financial markets will subsequently react and leave overall monetary conditions in the economy.
The timing of when he will be forced to raise rates is off course the big debate in the marketplace.
Forward pricing in the moneymarkets today is a 0.15% increase in the OCR in January 2014, which does not tell us anything at all.
It is more art than science on the timing and fine judgements as to whether to go hard and scare off inflation pressures, or go softly-softly and run the risk of inflation getting a foothold that feeds on itself.
Depending on what happens to the weather, currency, export commodity prices and the residential property market over the next six months, Governor Wheeler could be pushing the button on OCR increases by September at the earliest or June 2014 at the latest.
Movements over coming months in the two-year swap rate will provide some guide as to how the aforementioned determining factors are playing out.
What we do know is that the economy is in a much stronger position to handle the drought negatives than what the RBNZ thought was the case before the GDP numbers last Thursday.
The closely related decision to be made that is just as important for Governor Wheeler is when and how he pulls the “macro-prudential measures” (“mpm”) trigger on the banks on the assumption that the property markets continues to run hot and the Kiwi dollar stays up above 0.8000?
If he is forced to slow down bank credit/lending through the mpm mechanism at some point later this year, it is again negative for the NZ dollar as interest rate increases will be pushed further back.
Governor Wheeler will be closely observing events in Canada over coming months where the mpm card has been recently played.
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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 rogeradvice.com
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