BNZ Weekly Overview August 13

Welcome to the August 13 2009 issue of the BNZ Weekly Overview.

This week we have seen wholesale interest rates creep higher with increasing acceptance around the world of mild economic recovery. We have also seen a round of bank lending rate increases to reflect funding cost rises over the past couple of months. Interestingly across the Tasman economic conditions appear to be turning around so well the timing of monetary policy tightening has been advanced by some forecasters to early 2010 with the possibility recognised that rates could start rising even before the end of this year.

In the local housing market the past week has revealed increasing willingness by people to talk about prices rising – and this needs to be watched because of the obvious interest rate implications if we Kiwis start a new borrowing spree to purchase houses which people increasingly are realising are in structural short supply. That shortage of supply all but rules out a capital gains tax to stem rising prices because reduced construction by investors would aggravate the shortage even further – and absence of ready money from finance companies to fund developments is going to play a role in restricting the construction response this cycle anyway. So far the housing market is playing out largely as we suggested last year. Soon to come will be the affordable housing debate again. What could surprise? Unconventional Reserve Bank measures to soften the cyclical housing upturn.

Unsurprisingly, with increasing global acceptance of mild world recovery, plus mild upside risks appearing for NZ interest rate settings next year, the NZ dollar has remained strong and is still above US 67 cents. It also hit a ten month high against the Yen during the week and 18 month high against the British pound.

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