By Roger J Kerr
The local moneymarkets are currently pricing-in to the forward interest rates a 100% probability of a 0.25% cut (third) in the OCR next month and a 80% chance of a further (fourth) 0.25% decrease sometime in early 2016.
On the surface, weaker than expected economic data for employment and retail sales over recent times would be supportive of this pricing of further monetary loosening.
However, media headlines of the June quarter retail sales being disappointingly weak (confirming the slowing economy) with only a +0.1% increase over the previous March quarter were somewhat misleading.
The 0.1% increase was on top of a massive 2.3% lift in the March quarter, so in my view still very robust retail spending is occurring.
Retail spending remains very strong in my opinion with a 5.5% year-on-year increase. Likewise with employment trends in the economy, the official statistics may be cooling a bit, however our clients across the export industries (dairy and forestry excepted) still report a shortage of skilled labour being an impediment to their business growth aspirations.
Inevitably these business firms will need to pay more to fill the skilled and semi-skilled labour positions.
The Auckland property market continues to boom on with the fever now spreading to the Waikato and Bay of Plenty. The Reserve Bank know all too well that lower mortgage interest rates are fuelling the higher house prices and increasing risk levels.
The credit rating downgrade last week for the local banks’ subordinated debt was a timely reminder of these risks around financial stability that the RBNZ are also responsible for.
Two months ago the RBNZ made the judgment call that the plummeting dairy prices were much more negative for the economy and justified the OCR cuts, albeit slashing interest rates amidst a residential property boom increased other risks. Should dairy prices stabilise and recover over coming weeks/months, the RBNZ will have more leeway to consider whether a fourth OCR cut is warranted.
I suspect that the continuing house price increases are making the RBNZ more and more nervous and the odds are improving that the fourth OCR cut will not be warranted or needed.
It still appears to me that the 10 September Monetary Policy Statement from the RBNZ will not be as dovish on the economy as most are expecting.
Current market fixed-rate swap interest rates of 2.8% for one year to 3.20% for five years may be as good as it gets for borrowers.
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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