Roger J Kerr says confidence levels remaining high is understandable, however not that sensible. But he also sees an 'unexpected' opportunity to fix interest rates long-term

 By Roger J Kerr

Some local economic measures such as consumer confidence indices would suggest that mortgage interest rate increases over recent months have yet to make an impact on spending behaviour and thus inflation risks remain elevated.

It appears that for some sections of the economy job security/opportunities are outweighing the increased mortgage payments.

Given the gung-ho media publicity to the rock star economy going on forever the confidence levels remaining high is understandable, however not that sensible.

Similar to the FX markets being slow to recognise the adverse impact on the NZ economy from our dominant export commodity price plunging 38% over four months, households also appear slow to recognise that the productive heartland of the economy has taken a double whammy of lower commodity prices and a higher currency.

Unfortunately, it always seems to take newspaper headlines of manufacturing export companies laying off workers to attract the attention that the economy has some major headwinds.

We are starting to see such headlines and the RBNZ in setting monetary conditions cannot ignore the consequences of exporters cutting production and workforces.

The RBNZ (as always) have a fine balancing act this week with the OCR review.

They need to complete the 1% (fourth 0.25% increase) front-loading of interest rate increases without driving the NZ dollar higher.

They also need to be careful that they do not push two to four year wholesale swap interest rates lower with a commentary that causes such a market reaction.

To what extent they tone down their more hawkish than expected 12 June monetary policy statement will be the interesting part.

There is certainly plenty of emerging economic evidence that the economy may well grow at less than their sustainable, non-inflationary growth rate of 2.75% over the next 12 months.

The RBNZ have traditionally not changed their line too abruptly and thus there may be some disappointment on Thursday that they have not recognised the more recent adverse commodity/currency impact on the productive sector and remain fixated with the residential property market.

Corporate borrowers have yet another unexpected bite of the cherry to fix interest rates long-term with the yield on US 10-year Treasury Bonds decreasing to below 2.5% due to safe-haven buying on increased global geo-political tensions.

Our 10-year fixed rate swaps are back at 4.80% and offer an excellent entry point that will not be available when Federal Reserve boss Janet Yellen is ultimately forced to change her rhetoric on how and when US interest rates will need to increase.

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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