Roger J Kerr sees a local economy well-placed to face stresses, sees inflation as a risk, and suggests how corporate borrowers can hedge interest rate risk

By Roger J Kerr

If you believed all the now overly pessimistic forecasts on the NZ economy you would buy into the RBNZ slashing the OCR by 0.50% this Thursday.

While the probability of a 50 basis point cut has increased over the last week, it remains quite low.

Governor Wheeler will probably not do it as it would seem to be panicking on the economy which is not justified.

While some key economic indicators have deteriorated and it looks like 2% GDP growth instead of 3%, it is hardly Armageddon for the NZ economy. It is easier for the RBNZ to provide guidance of the future by cutting 0.25% this week and then cutting again at the MPS in early September. A 0.50% cut now could lead to a conclusion of the cuts coming to an end, which is not the future guidance they want to deliver.

The latest inflation data has not provided any fresh clues as to why non-tradable inflation continues to track so low when the economy has been reasonably robust and capacity utilisation of manufacturers has been running higher.

Technological advances continue to reduce prices in many service areas of the economy and partially explains the failure of the old “strong economic growth = rising inflation” maxim to occur over recent years.

However, the RBNZ would be unwise to wed themselves entirely to these new low inflation paradigms as being permanent.

My observation is that right now in the NZ economy local government rates bills are sharply higher, electricity prices are on the rise again and imported consumer good/building materials will definitely be going up in price due the pronounced NZD currency depreciation. Food and commodity prices have been falling over recent months; however my gut feel is that from current levels the greater risk is price increases, not further falls. Grain prices in the US have already started to turn upwards due to climatic and supply variables.

Borrowers should already have longer-dated fixed rate swaps in place and thus be well hedged against further increases in five to 10 year market swaps rates due to US Treasury Bond yields continuing their journey higher.

For shorter terms out to four years the recent reduction in market interest rates and the flat yield curve provides an opportunity for borrowers to examine purchased options and collar options on 90-day rates. 


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Daily swap rates

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var root_url = "http://www.interest.co.nz/charts-csv/";
var tabs_count="7";
var csvfiles_loc= ["/charts-csv/chart_data/interestrates/swap-1yr.csv"," /charts-csv/chart_data/interestrates/swap-2yr.csv"," /charts-csv/chart_data/interestrates/swap-3yr.csv"," /charts-csv/chart_data/interestrates/swap-4yr.csv"," /charts-csv/chart_data/interestrates/swap-5yr.csv"," /charts-csv/chart_data/interestrates/swap-7yr.csv"," /charts-csv/chart_data/interestrates/swap-10yr.csv"];
var chart_title_arr= ["Swap rate","Swap rate","Swap rate","Swap rate","Swap rate","Swap rate","Swap rate"];
var chart_subtitles_arr= ["Opening daily rate","Opening daily rate","Opening daily rate","Opening daily rate","Opening daily rate","Opening daily rate","Opening daily rate"];
var tab_titles_arr= ["1 year %","2 years %","3 years %","4 years %","5 years %","7 years %","10 years %"];
var source_arr= ["Westpac","Westpac","Westpac","Westpac","Westpac","Westpac","Westpac"];
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else if (arr.length < 536)
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else if(arr.length == 536)
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var b=2;
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// to generate the format for date representation in x axis

var timestamweek = 604800000;
var timestamday = 86400000;
var timestammonth30 = 2592000000;
var timestammonth31 = 2678400000;
var timestamyear = 31536000000;
var timestamquarterly = 7776000000;

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var yy1=fomat.substring(k2+1,k3+1);

// conversion of months into numerical form

//+++++++++++++++++++++++++++++++++++
if (mm == "Jan")
{
mm= "01";
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else if (mm == "Feb")
{
mm= "02";
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else if (mm == "Mar")
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mm= "03";
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mm= "04";
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else if (mm == "May")
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mm= "05";
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mm= "06";
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mm= "08";
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mm= "09";
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mm= "10";
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{
mm= "11";
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else if (mm == "Dec")
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mm= "12";
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do {
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do {
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var k3=k;

var dd= fomat.substring(0,k1);
var mm = fomat.substring(k1+1,k2);
var current_year=""+new Date().getFullYear();
var c_year=Number(current_year.substring(2,4));
var c_data=Number(''+fomat.substring(k2+1,k3+1));
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{
var yy = “19”+fomat.substring(k2+1,k3+1);
}
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{
var yy = “20”+fomat.substring(k2+1,k3+1);
}
// conversion of months into numerical form

//+++++++++++++++++++++++++++++++++++
if (mm == “Jan”)
{
mm= “01”;
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{
mm= “02”;
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mm= “04”;
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{
mm= “05”;
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mm= “06”;
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mm= “07”;
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mm= “09”;
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mm= “10”;
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mm= “11”;
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{
mm= “12”;
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var timestam_1 = Date.parse(date);
var timestam= timestam_1+86400000; //86400000 added to get correct timezone output from Date.parse
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var dd2 = time4.getDate();
var mm2 = time4.getMonth();
var flag_y=arr[i][1];
var ahref_title=”Click here for full story”;
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var url=arr[i][2];
var flag_date='{“x”:’+timestam+’, “title”:”  “,”text”:”Click here for Story!”}’;

flagAr[csvgen_counter].push(flag_date);
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var yy2 = time4.getFullYear();
var yy3 = yy2+””;
var yy4= yy3.substring(2,4);
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//+++++++++++++++++++++++this is for month conversion+++++

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mm2 = “Jan”;
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mm2 = “Feb”;
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else if (mm2==2)
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mm2 = “Mar”;
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mm2 = “Apr”;
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else if (mm2==4)
{
mm2 = “May”;
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mm2 = “Jun”;
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mm2 = “Jul”;
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mm2 = “Aug”;
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mm2 = “Sep”;
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mm2 = “Oct”;
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mm2 = “Nov”;
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mm2 = “Dec”;
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fomat2=mm2+”-“+yy4;
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range_selector=3;
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fomat2=mm2+”-“+yy4;
padding_value=timestamquarterly;
range_selector=3;
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fomat2=dd2+”-“+mm2+”-“+yy4;
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range_selector=3;
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var decpad;
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if(i==(arr.length-1))
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// Functionality to get the last value

var xvalu=dd2+”-“+mm2+”-“+yy4;
var yvalu= String(arr[i][1]);
var xyvalu=”Latest value at “+xvalu+” is “+yvalu;
updt=”Updated on “+xvalu;
}

tempAr.push(timestam);
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arr[i][1]=null;
}
yaxisAr[csvgen_counter].push(arr[i][1]);
// tempAr1.push(timestam);
// tempAr2.push(tempAr1);
tempAr.push(arr[i][1]);
last_val=timestam;
finalAr[csvgen_counter].push(tempAr);
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xpad=last_val+padding_value; //*****************to end up graph early//////
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vi=arr.length-i;
arr.length=arr.length-vi;
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fomat = replic;

var k=0;

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do {
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var k2=k;

do {
k++;
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var k3=k;

var dd= fomat.substring(0,k1);
var mm = fomat.substring(k1+1,k2);
var yy = "20"+fomat.substring(k2+1,k3+1);

// conversion of months into numerical form

//+++++++++++++++++++++++++++++++++++
if (mm == "Jan")
{
mm= "01";
}
else if (mm == "Feb")
{
mm= "02";
}

else if (mm == "Mar")
{
mm= "03";
}

else if (mm == "Apr")
{
mm= "04";
}

else if (mm == "May")
{
mm= "05";
}

else if (mm == "Jun")
{
mm= "06";
}

else if (mm == "Jul")
{
mm= "07";
}

else if (mm == "Aug")
{
mm= "08";
}

else if (mm == "Sep")
{
mm= "09";
}

else if (mm == "Oct")
{
mm= "10";
}

else if (mm == "Nov")
{
mm= "11";
}

else if (mm == "Dec")
{
mm= "12";
}
// +++++++++++++++++++++++++++++++++++++++++++++++++++++++

var date = mm+"/"+dd+"/"+yy;
//here flagAr may be
var timestam = Date.parse(date);
var time4 = new Date(timestam);
var Weeko = time4.getDay();
var dd2 = time4.getDate();
var mm2 = time4.getMonth();

var yy2 = time4.getFullYear();
var yy3 = yy2+"";
var yy4= yy3.substring(2,4);
//++++++++++++++++++++++++this for days conversion++++++++++++++++++++++++++++
if (Weeko==1)
{
Weeko = "Mon";
}

else if (Weeko==2)
{
Weeko = "Tue";
}

else if (Weeko==3)
{
Weeko = "Wed";
}

else if (Weeko==4)
{
Weeko = "Thu";
}

else if (Weeko==5)
{
Weeko = "Fri";
}

else if (Weeko==6)
{
Weeko = "Sat";
}

else if (Weeko==0)
{
Weeko = "Sun";
}

//+++++++++++++++++++++++this is for month conversion+++++

if (mm2==0)
{
mm2 = "Jan";
}

else if (mm2==1)
{
mm2 = "Feb";
}

else if (mm2==2)
{
mm2 = "Mar";
}

else if (mm2==3)
{
mm2 = "Apr";
}

else if (mm2==4)
{
mm2 = "May";
}

else if (mm2==5)
{
mm2 = "Jun";
}

else if (mm2==6)
{
mm2 = "Jul";
}

else if (mm2==7)
{
mm2 = "Aug";
}

else if (mm2==8)
{
mm2 = "Sep";
}

else if (mm2==9)
{
mm2 = "Oct";
}

else if (mm2==10)
{
mm2 = "Nov";
}

else if (mm2==11)
{
mm2 = "Dec";
}
//++++++++++++++++++++++++++++++++++++++++

//weekly
if ( timestamvar == timestamweek)
{
fomat2=dd2+"-"+mm2+"-"+yy4;
}

// Daily
else if ( timestamvar = timestamyear)
{
fomat2=mm2+”-“+yy4;
}

//monthly
else if ((timestamvar <= timestammonth30)&&(timestamvar = timestamquarterly)
{
fomat2=mm2+”-“+yy4;
}

arr[i][0]= fomat2;
var decpad;

decpad = parseFloat(arr[i][1]);
//arr[i][1] = roundVal(decpad);
arr[i][1] = decpad;
if(i==(arr.length-1))
{

var xvalu=dd2+”-“+mm2+”-“+yy4;
var yvalu= String(arr[i][1]);
var xyvalu=”Latest value at “+xvalu+” is “+yvalu;
updt=”Updated on “+xvalu;
}
}

}
}

//other required functions

//chart configuration starts here

function getXMLHttpRequest(file) {

//var arrSignatures = [“MSXML2.XMLHTTP.5.0”, “MSXML2.XMLHTTP.4.0″,
//”MSXML2.XMLHTTP.3.0”, “MSXML2.XMLHTTP”,
//”Microsoft.XMLHTTP”];

//for (var i=0; i < arrSignatures.length; i++) {

try
{
var xmlhttp = new window.XMLHttpRequest();
xmlhttp.open("POST",file,false);
return xmlhttp;
}
catch(e)
{
error=e.message;
}

//}
throw new Error("MSXML is not installed on your system.");
}

function readCSV(locfile) {
// load a whole csv file, and then split it line by line
var req = new getXMLHttpRequest(locfile);
//req.open("POST",locfile,false);
req.send("");
return req.responseText.split(/n/g);
}

function parseLineCSV(lineCSV) {
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lineCSV = lineCSV.replace(/,/g," ,");

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// This is continuing of 'split' issue in IE
// remove all trailing space in each field
for (var i=0;i<lineCSV.length;i++) {
lineCSV[i] = lineCSV[i].replace(/s*$/g,"");
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lineCSV[lineCSV.length-1]=lineCSV[lineCSV.length-1].replace(/^s*|s*$/g,"");
var fstart = -1;

for (var i=0;i=0) {
for (var j=fstart+1;j<=i;j++) {
lineCSV[fstart]=lineCSV[fstart]+","+lineCSV[j];
lineCSV[j]="-DELETED-";

}
fstart=-1;
}
}
fstart = (lineCSV[i].match(/^"/)) ? i : fstart;
}

var j=0;

for (var i=0;i<lineCSV.length;i++) {
if (lineCSV[i]!="-DELETED-") {
CSV[j] = lineCSV[i];
j++;
}

}

return CSV;
}

function roundVal(val_num){
var dec = 2;
var result = Math.round(val_num*Math.pow(10,dec))/Math.pow(10,dec);
return result;
}

function setdecimalpoints(deca)
{
var deca1= deca;
var deca2= parseInt(deca);
if((deca1-deca2)!=0)
{
return 2;
}
else
{
return 0;
}
}
for(i=0;i

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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