Tony Alexander's BNZ Weekly Market Overview

This week in New Zealand we have not learnt anything really new with regard to how the economy has been functioning, where it is likely to go and at what speed, and how quickly the inflation risk will rise and therefore interest rates go up – except with regard to inflation expectations. A quarterly survey undertaken by the Reserve Bank has found a lift in expectations for where inflation will be in two years time to 3% from 2.6% in the previous quarter. One might discount this result to some extent because headline inflation is at 4.5% courtesy substantially of the boost to GST. But that argument would apply almost equally for the 4% inflation rate in place at the time of the previous survey.

The piece of data is not a major indicator but it does serve as a reminder that every uplift in the rate of economic growth not driven by a productivity surge brings a rise in inflation and a rise in interest rates. For the moment the markets remain relatively sanguine about that risk, as evidenced by medium to long term borrowing costs not trending upward in recent times. But at some point market attention will turn to upside inflation risks and the thing to watch then will be the extent to which the many borrowers sitting on a floating rate at the moment act quickly to lock in a fixed rate.

Apart from that the situation in New Zealand remains one of weak growth for the past year as householders and farmers have concentrated on repaying debt and the economy and our sentiment has been hit by a wide range of shocks from weather events to tectonic ones to a high currency and finance company issues.

But looking ahead for the next two years as we see some rather large stimulatory factors coming into play.

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