Roger J Kerr says having been forced to do a u-turn last month with their monetary policy stance, the RBNZ will be very conscious to deliver to market expectations this week

By Roger J Kerr

The signals and messaging you can expect from RBNZ Governor Graeme Wheeler this Thursday in the quarterly Monetary Policy Statement are as follows:-

Lower interest rates are required in New Zealand to make us a less attractive investment destination for overseas punters looking for any kind of yield return. Our short-term interest rates have been allowed to get to 0.75% above those of Australia with the RBNZ refusing to cut the OCR through May/June/July, whereas the RBA cut twice (May and early August). The RBNZ will endorse current market pricing which is for two and a half 0.25% cuts over the next seven months.

The NZ economy continues to expand at a fairly robust pace without the normally associated inflation increases due to high immigration (thus no wages pressures), higher currency than expected (exporters being well hedged) and strong competition across most industries. Apart from stretched resources in the building sector, non-tradable inflation is not expected to be forced higher due to lower interest rates.

A two-tier interest rate market has developed with official OCR/wholesale BKBM interest rates now well below actual interest rates were borrowers and investors meet and agree price. The banks are having to hold three and six month retail deposit interest rates above wholesale rates to keep investors in the door as many have been exiting bank deposits for higher yielding dividend stocks and property syndicates. Bank credit margins for their wholesale borrowing on offshore debt markets have increased substantially over the last 12 months, although the credit spreads are levelling off currently. All good reasons why the banks cannot pass through OCR cuts into lending interest rates.

Global market volatility has decreased and the Brexit outcome was not as risky/disruptive as first believed. Potential shocks to the global markets from Chinese economic developments have reduced in probability as the west starts to better comprehend the transition of their economy from capital investment to consumer spending.

The housing market investment bubble and profitability carnage in the dairy sector are still major risks for the NZ economy. However, prudent preventative management by all parties involved is happening and the risk of a major catastrophe that damages the overall economy has arguably reduced somewhat.

Having been forced to do a U-turn last month with their monetary policy stance the RBNZ will be very conscious to deliver to market expectations on this occasion. The last thing they will want to do is to disappoint the financial markets and send the NZ dollar higher as a consequence.

Daily swap rates

<!–

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Roger J Kerr contracts to PwC in the treasury advisory area. 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