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Weekly Overview – April 16
Wednesday April 16th 2014
Inflation remains low in New Zealand at just 1.5%. But with the pace of economic growth lifting in an environment of resource shortages the rate will soon start heading toward 3%. That is why the Reserve Bank is likely to raise its official cash rate again next Thursday and the current pinch of weakness in the NZ dollar may not be sustained.
New Zealand is experiencing a migration boom with the net loss of ourselves to Australia plummeting from near 40,000 in mid-2012 to just 15,000 in the past year. The all-country gain for the NZ population is now 29,000 and headed toward 40,000. The implications are obvious for the pace of economic growth.
This week we note how the recent surge in NZ productivity growth is just a catch-up following the rout of 2008-09 rather than evidence of a new permanently higher growth path for the NZ economy. This is important because it means inflation risks will potentially easily build as growth accelerates this year which is why further interest rate rises loom and the NZ dollar will remain well supported though with some capping from easing dairy prices and continued tapering of US money printing.
Thus morning the Reserve Bank met expectations by raising the official cash rate 0.25% to 2.75%. They project interest rates rising right to the end of their forecast period in the March quarter of 2017 (thus allowing for rates to still be going higher that year). Their comments on the NZ economy were very positive and on the exchange rate front merely noted that in the long run the NZD will go down from current levels.
This week we have learnt that businesses in New Zealand intend hiring a lot of people and investing a lot in capital equipment. Unsurprisingly then with this sort of positive sentiment the NZD has risen back above 84 cents against the US dollar.
This week little has happened in the FX and interest rate markets beyond a reminder of strong support for the NZD from high commodity prices with Fonterra announcing another payout rise, plus a little bit of downward interest rate pressure from doubts over US growth.
Wholesale interest rates and the NZD have not moved by much over the past week. The NZD remains as well supported as ever by accelerating NZ growth and expectations of interest rates rising from March 13.
We haven’t learnt much fresh about the NZ economy this week beyond some weakness in debit and credit card spending in January somewhat calling into question the euphoria expressed by many heading into Christmas. Nevertheless things are improving in our economy and why not! Our terms of trade are at their highest level since 1973, there is a huge reconstruction job now solidly underway in Christchurch set to stretch out for 5 – 8 years, hefty investment is occurring in the dairying sector and the country’s infrastructure, and jobs growth has picked up tremendously.