Roger J Kerr says there could be a similar pattern of OCR increases from the RBNZ next year as there has been this year

 By Roger J Kerr

This Thursday’s Reserve Bank of New Zealand monetary policy statement will only be of passing interest to the financial markets as an update on the economic outlook from one source.

The importance of the statement has been overridden by the interest rate “pause” message from the RBNZ in the late July OCR review.

The statement this week should re-confirm that stance on the outlook for monetary policy settings.

The RBNZ should be reasonably satisfied that local economic trends/developments over recent months have panned out close to their July expectations.

The housing market has levelled off, the exchange rate is lower and consumer/business confidence has pulled back from the unsustainable highs.

What they would not have expected is the continuing carnage with dairy prices. Wholemilk powder prices and log prices have plunged to new lows and the negative ripple impact through the provincial economy should not be underestimated.

In addition to lower GDP growth and inflation forecasts, the RBNZ will on this occasion lower their 90-day interest rate forecast as well.

Standing back from the near-term hum-drum of the moneymarkets, the observation is that the return of New Zealand’s short-term interest rates to “normal” levels (after the extraordinary anomaly of a 2.5% OCR after the GFC and earthquakes) is not turning out to be as smoothly phased as the RBNZ originally planned.

The 1% increase from 2.5% to 3.5% this year was jammed into a five month period from March to July. Odds are on that it may be the same pattern next year.

Current forecasts are likely to be for four equal 0.25% OCR increases each quarter from March 2015.

The reality is that it could be sooner or later and more concentrated than what is forecast.

The timing and phasing is highly dependent upon the exchange rate level and economic growth.

A lower NZD/USD rate well below 0.7800 (our forecast) over the next six months will increase both GDP growth and inflation above the revised RBNZ forecasts. Most agree that NZ short-term interest rates need to increase another 1.00% in 2015, how and when that happens is the unanswered question.

Our two to four year wholesale market swap rates have moved lower than what the RBNZ would ideally like to see for bank fixed-rate mortgage pricing at this juncture.

Like it or not, these term interest rates are driven by US long-term Treasury Bond interest rates and elevated global geo-political risks over recent weeks has seen the weight of safe-haven investor money push US yields down.

US GDP growth and inflation trends however still suggest that these long-term interest rates can easily increase by over 1% over the next 12 months as the economic fundamental factors outweigh the investor safe-haven flows.

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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