Roger J Kerr sees "one hell of a turnaround" by the RBNZ in the way they look at their 90-day interest rate projections

 By Roger J Kerr

The mild surprise in last week’s Monetary Policy Statement (MPS) from the RBNZ was that they adjusted down their forward 90-day interest rate projections the full way to match prior interest rate market pricing.

It is one hell of a turnaround in view/forecast to what they said in early June.

A good lesson to everyone that it is not too wise to base all your interest rate risk management decisions on someone’s interest rate forecast as forecasts have a habit of changing abruptly (even the official RBNZ’s forecasts!).

The main take-outs from the MPS for me were as follows:

- The RBNZ are now more confident about jawboning the NZ dollar lower as they have interest rates firmly on hold, the USD is strengthening globally and our commodity prices have tumbled.

- They have revised their GDP growth forecasts for March 2015 and March 2016 upwards, however inflation forecasts are now lower than their June MPS forecasts? Good to know that they see a high level of price setting discipline in a still buoyant economy, but I am not so sure.

- It is not the time to get too complacent about future inflation pressures as tradable inflation will eventually increase with a lower NZD/USD exchange rate (after hedging runs off) and capacity constraints in manufacturing and construction sectors increasing non-tradable inflation is well documented.

- It is not at all clear as to how much of the $5 billion reduction in dairy farmer incomes this next year compared to last year will transmit through as a negative for the wider economy. Just how far rural spending and investment plans have been cut back remains to be seen.

- The quite different composition of the current net immigration inflows compared to earlier cycles does mean that the impact on housing demand/prices is not as great as initially feared by the RBNZ back in June.

- The lack of wage inflation in a period of strong GDP growth is something of a surprise; however it is explained by the strong inflows of foreign workers on work-permits. South Island construction firms and dairy farmers are quite rightly sourcing reliable and hard-working labour from the Philippines to meet their requirements.

- The RBNZ people visited 61 private sector entities over the previous quarter, unfortunately only three of those organisations were true manufacturing companies (two plastics manufacturers and one carpet manufacturer). No wonder the manufacturers get a little peeved from time to time that their views are not being acknowledged.

Borrowers with interest rate risk need to be looking to what is happening in the US Treasury Bond market as the main source of future risk.

The US 10-year bond yield has increased 20 points from 2.40% to 2.60% over the last week and can easily increase another 40 points to above 3.00% over coming weeks/months.

The implications for our three to 10 year swap rates are obvious. 

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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