The full pdf version of the Weekly Overview is contained here.
Weekly Overview – March 13
Thursday March 13th 2014
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.
Interest rates are headed up this week and borrowers should be careful in their assumptions about the peak in rates and how long rates stay high. What I have picked up from two days visiting Christchurch this week (on top of not a single soul believing the CBD will get anywhere for many years) is widespread expectations that the residential rebuild period will take a lot lot longer than commonly thought. The RB last week said they assume a peak of 2016 – 17. One person in Christchurch suggested 5 – 8 years as the reconstruction duration given the delays because of huge compliance issues, staff shortages, and product delays.
The Reserve Bank met expectations this morning by leaving the cash rate at 2.5%, but basically said they will be raising it soon. We expect 3.75% by the end of this year and near 4.5% next with upside risk. Were I borrowing currently I would fix three years at 6.39% given that by mid-year the floating rate will probably be higher than that.
This year is going to be all about interest rates rising in New Zealand as growth surges perhaps toward 4%, the unemployment rate plummets as companies scramble for already scarce employees, whilst offshore massive uncertainty about monetary policies continues. The election late this year will generate a lot of analysis but the actual impact on the economy and financial asset prices will be minimal if measurable at all.