Tony Alexander's BNZ Weekly Overview

This week’s Overview is smaller than normal as I have been (and still am) on the road giving talks in Blenheim, Nelson and Greymouth and substantial time has been spent driving. So lets get into it. The Reserve Bank this morning met fairly much everyone’s expectations by leaving the official cash rate unchanged at 2.5% while noting that the justification for the 0.5% cut back in March post-earthquake had all but disappeared but they are staying their hand just for the moment to see how things pan out offshore and because the NZD is so high.

The markets have now moved to factoring in a 0.5% cash rate rise from September and that is our view also now. We then expect no rise in October then another in December so the cash rate ends the year at 3.25%. We then see another rise as likely in March and the rate ending 2012 at 5%.

On the back of stronger market expectations of monetary policy tightening swap rates have risen further this week and we have seen more business borrowers in particular locking in some of their core debt in the 2-3 year area. Over the past week while a few mortgage holders have switched from floating to fixed the volumes have as we expected been exceptionally light given the jump one has to make of 1.4% in cost for example to fix three years.

The higher interest rate expectations have boosted the NZ dollar further – though the big factor in play which pushed it to US 87.7 cents yesterday and has it near 87 cents this afternoon was worries about the debt situation in the United States. Some investors are quitting the US currency and placing tiny amounts of their money in the likes of the NZ and Aussie dollars. Speaking of the latter, it has jumped up firmly this week because inflation in the June quarter in Australia was higher than expected so now the markets have pulled back on expecting an easing of monetary policy across the ditch and that is why the AUD has risen, we have eased against the AUD, and why we have had a bit of extra upward pressure on our wholesale interest rates.

In other news for the week, the NBNZ Business Outlook survey results were released for July and they were well and truly on the strong side. A net 44% of businesses said they expect their activity levels to rise over the coming year compared with a net 39% in June and a ten year average of just 19%. The result bespeaks of high optimism about the future and it is unsurprising then that a net 19% said they plan hiring more people. This was up from 10% in June, well above the average of 4%, and the highest result in 16 years - since March 1995.

Click here for the full Weekly Overview by Tony Alexander (pdf)

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