Roger J Kerr says the inevitable increases in the OCR in early 2014 are likely to be larger and more rapid than what most expect

 By Roger J Kerr

The debate on when and how rapidly the RBNZ will increase short-term interest rates in New Zealand is only going to intensify over coming months.

Differing opinions and forecasts, interpretation of official economic data and thus forward moneymarket pricing all combine to make this a fascinating period to be witnessing.

My conclusion on the current RBNZ monetary policy stance and strategy is that Governor Wheeler is buying time until the US can taper-off their accommodative money printing.

The Governor fully understands that there are serious dangers for the NZ economy if he shoves our interest rates up well ahead of the US, the net result would be a rising NZ dollar currency value and therefore reduce confidence, jobs and investment in the critical export sector.

He is clearly not prepared to risk that scenario eventuating, thus intervening/talking the dollar down and delaying the inevitable increase in short-term interest rates as long as possible.

He is taking a calculated risk that the hot housing market will not transfer through to more general inflationary pressures over the intervening period.

In my view, the RBNZ is underestimating the strength/duration of the housing market upswing (due to the massive supply/demand imbalance in Auckland and record low mortgage interest rates) and the potential inflation risks.

However, in the Governor’s eyes he is prepared to take the risk and deal with consequences later if he has to.

In other words, inevitable increases in the OCR in early 2014 are likely to be larger and more rapid than what most expect.

If the RBNZ do find themselves behind the 8-ball in addressing rising inflation they will have to act more stringently and severely to rein the expectations and pressures back in when they do act.

Governor Wheeler is just hoping that by nine months from now Ben Bernanke at the US Federal Reserve will be tapering back the US bond buying and the USD itself will be strengthening on global FX markets to keep any Kiwi dollar increases from higher interest rates in check. A difficult balancing act for the Governor in anyone’s language.

However, one can understand why he is keen to get the macro-prudential LVR ratios in place with the banks so as to temper the more speculative property market activities in the meantime.

It is easy to see that RBNZ’s management of monetary policy is more of an art than a science.

Thursday’s GDP growth figures for the March quarter should come out well above consensus forecasts of +0.60%.

It will be another reminder to the RBNZ that they are again underestimating the economy’s expansion, just as they underestimated growth in 2012.

Even though the March figures will be on top of the super strong +1.5% lift over the December quarter, all sectors of the economy were certainly humming in the first few months of the years with the summer drought temporarily increasing agriculture production as more livestock went to the works earlier. 

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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