Bollard’s policy review may give clues to timing of OCR hike

Bollard’s review of policy may give clues to timing of rate hikes

By Jonathan Underhill

July 25 (BusinessDesk) – The Reserve Bank of New Zealand will keep the official cash rate unchanged this week, with questions now around whether he moves to lift the rate in the third or fourth quarter, if at all this year.

Governor Alan Bollard will hold the OCR at 2.5%, according to a Reuters survey of 12 economists. A false dawn last year prompted him to raise the rate to 3% only to return it to the record low after the Christchurch earthquakes this year.

Since then figures have shown the economy reviving, expanding twice the expected pace in the first quarter and adding steam to the inflation rate in the latest quarter.

Bollard is getting the wrong signals from the domestic economy, which it is a personal goal of his to bring back into balance and away from consumption. The residential property market is showing signs of stirring and a post-float-high kiwi dollar makes imported consumer goods look cheaper. The tradable sector is strong too, for commodity exporters benefiting from high global prices.

Manufacturers shipping overseas are being pummeled by the currency effect.
The pick-up comes ahead of quake-recovery spending and activity that will stimulate the national economy.

Much of New Zealand’s relatively mild passage through the ‘global debt crisis’ was thanks to trade and exchange with Australia tied to China’s growth and its voracious appetite for resources. Australia’s economic expansion is looking softer and the kiwi dollar has at last been climbing against its Australian counterpart, to the highest since August 2010 at 79.69 Australian cents.

“The possibility of hikes occurring as soon as September cannot be ruled out,” said Philip Borkin, economist at Goldman Sachs Partners New Zealand, in a note. “At the same time, the global economy has deteriorated and we believe it is far from a risk-less strategy tightening into a weaker global backdrop.”

Key developments include the ability of America’s Congress to reach an agreement on lifting the debt ceiling to prevent the world’s biggest economy defaulting on interest payments and Europe’s ability to navigate through its sovereign debt crisis without contagion.

Bollard has about 100 basis points of hikes up his sleeve for the next 12 months, based on the Overnight Interest Swap curve. That’s nearly double the expectations of July 12, before government figures showed the economy grew 0.8% in the first quarter, twice the expected pace, and inflation sped to 1% in the second quarter.

Currency traders already spotted all this, lifting the kiwi dollar against the pound, euro, greenback, Australian dollar and on a trade-weighted basis. The TWI is at the highest since February 2008 at above 74.

But the currency strength takes some of the weight off Bollard, according to UBS New Zealand economist Robin Clements.

“This currency path will serve to negatively affect tradable sector growth and dampen inflationary pressures i.e. offsetting other upward influences,”
Clements said in a note. “In principle, the exchange rate strength should work to reduce and delay the need for the RBNZ to hike rates.”

In the June Monetary Policy Statement, the RBNZ projected the TWI declining to 66 by 2014. That would require a decline of almost 11%.

The TWI has strengthened since the MPS, or as Clements says, the exchange rate “has moved to a material extent in the opposite direction to which the RBNZ was assuming in the June MPS.”

Outside of Christchurch, the nation has been humming along on high commodity prices, cheaper imports and a resilient manufacturing sector. The jobless rate edged back to 6.6% in the first quarter.

(BusinessDesk)

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