Roger J Kerr thinks we need to be watching 'the three Cs'; says nobody believes interest rates are going to stay low now – the only question is how much they will rise by

By Roger J Kerr

When I was a kid playing rugby, our coach (often my father!) would drum into us the importance of the “three P’s” to win any footie match i.e. Possession, Position and Pace.

I am sure the Super Rugby teams of today are still reminded of these fundamental principles.

For the NZ economy the old and new maxims for what determines our good or poor fortune could be categorised as the “three C’s” – Climate, Currency and China.

All three variables play a crucial role in the performance of our economy and related price inflation /interest rate outcomes.

The RBNZ and every economic forecaster have been reminded over recent weeks that in NZ the climatic conditions often play a pivotal role in term of primary production/supply, agricultural prices and thus the overall economy.

Soaring food prices in January and February due to unseasonal weather and poor growing conditions caused the CPI inflation increase for the March quarter to be more than three times the RBNZ official forecast of +0.30%.

The RBNZ have already stated that they see these price increases as one-off’s that will not re-occur.

What if they are wrong in this assumption?

The anecdotal evidence I observe throughout New Zealand is that fields are saturated with water and vegetable growers for instance cannot get winter crops like cabbage, cauliflower, asparagus and Brussels sprout planted.

Grain prices are up as Canterbury cereal farmers could not harvest their crops due to the rain.

Foods prices will stay up for many months to come as supply volumes are down.

The combined abacus at the RBNZ might be whirring a little faster to factor in the influence of weather on the NZ economy and inflation at this time.

Tradable inflation is back in positive territory in the March quarter CPI figures released last week.

We may have finally seen the impact of the lower currency value on imported goods prices as previous price decreases drop out of the annual numbers.

Add in rampant increases in construction costs and the possibility of wage increases finally lifting and the inflation picture is a lot different going forward compared to the benign conditions over recent years.

Net result is the increasing likelihood that the RBNZ will be forced by the economic data later in the year to bring forward their first OCR interest rate increase to early/mid 2018.

International investment follows international trade and we are witnessing considerable inwards Chinese investment into New Zealand over recent years.

I am not just talking about Chinese individuals buying houses in Auckland as a safe haven for their money out of China, however the more significant Chinese part-ownership of primary product processors such as Synlait and Silver Fern Farms.

Also witness the wild volatility in whole milk powder prices (thus milksolids payout to dairy farmers) due to the large export volumes going into China with their haphazard and nonsensical import buying behaviour.

The China influence and impact is not going away, it is only going to increase, therefore we have to live with the volatility and manage our own price risks.

No-one is seeing interest rates staying low now. The only question is when and by how much they increase?

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