By Roger J Kerr
Inflation numbers for the September quarter released last week may well be a reflection of things to come over the next 12 months for NZ monetary policy and thus interest rate markets.
The moneymarkets have been pricing in a rising annual inflation rate as stronger GDP growth, a resource-constrained construction sector and increasing capacity utilisation levels all point to an environment of price increases being sustained.
The two and three year swap rates are already pricing in significant OCR increases in 2014 and from current levels I would only see those swap rates moving higher over coming months if the NZ dollar comes down significantly.
The short-term swap pricing has already built in the increased inflation trajectory, however it has not built-in the scenario that Graeme Wheeler might have to remove low interest rates sooner and harder if the exchange rate was to fall away.
However, there is certainly no sign of that happening anytime soon with the Kiwi dollar up at 0.8500 against the USD and arguably if it stays up here the first OCR change will be in later in 2014, not in March 2014 as many expect today.
Whilst corporate borrowers may currently bemoan the steepness of the interest rate yield curve making forward starting fixed rate swaps not that attractive well above 5.00%, there is a positive story developing for those seeking to refinance bank debt or raise additional debt form the banking market.
The steep curve makes five years plus corporate bonds attractive to fixed interest investors in terms of yield return (i.e. above 6.00%) and thus I see more corporates issuing locally direct to such investors.
The banks will therefore be very keen to replace the loan assets they have lost from their books and will pitch competitive pricing to write new corporate lending business.
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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
6 Comments
Agree re Canterbury re-build. A lot of talk about all that insurance money coming in but it is largely negated by the whopping premium increase going out. If my Insurance renewels are any indication; for areas other than Canterbury the effect is deeply negative.
Better to think of the insurance payout as a loan, to be paid off over coming years. There is no pot of money sitting in a vault to pay for the damage, prior premiums have been spent or are locked up as minimum reserve requirements. Sorry.
Cuts not hikes will be coming as US & Euro, India , Middle East hit more potholes.
Deflation is the biggest fear. We would be in serious deflation were it not for US $$printing, NZ immigration & lower interest rates.
Dont fix for more than 12 months.
Interest rates will not be hiked anytime in NZ over the next 3 years, unless we wish to invite deflation.
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