The Reserve Bank has just announced that they are leaving the Official Cash Rate unchanged at 2.5%.
This will probably make mortgage holders happy, but may annoy our exporters and the farming community.
Mortgage holders will remain comfortable in the view that lending rates – especially the short-term lending rates - will probably remain low.
Exporters will fear that the New Zealand Dollar will remain high, making them less and less viable. This is because as New Zealand interest rates remain higher than a lot of other western economies and as investors’ appetites for risk remain high, so does the Kiwi. This makes our exports worth less than they otherwise would be.
There are risks here that the housing market will rally, possibly leading to a housing bubble. The Reserve Bank of Australia warned about this possibility this week. This may come about due to an increase in demand for houses due to lots of cash “sitting on the sidelines” and a low interest rate environment. This is one of the things that caused the global financial crisis in the first place – the housing bubble in the USA.
There is also a risk that a high kiwi dollar will not help exporters – many of whom are on the edge of a cliff, saying it is too tough, I’m out if things don’t pick up soon. This would include farmers as well as manufacturers, meaning that the much heralded (and greatly desired) export led recovery that the Reserve Bank is looking for may stumble.
The Bank has been in a tough position in making the call this month. Increasing the rate would make investing in the Kiwi even more attractive to overseas investors, but reducing the rate would make borrowing more attractive, perhaps prompting Kiwis to start the “borrow and spend” approach to life again.
Almost all economists expected the rate to be left unchanged – even the ASB, who thought it would be a good idea to drop the rate, did not think they would do it. So at least Bollard did not disappoint the market – but it has been something of a Hobson’s choice – damned if you do and damned if you don’t.
The comments that have accompanied the rate announcement reveal more of the Reserve Bank’s view than its inaction on the rate. Bollard would get no prizes for stating the obvious when he said that “The outlook remains highly uncertain” despite indicating that “Overall economic growth is evolving broadly in line with our forecasts.”
He really is a “dollar each way” bloke!
Another telling comment was;
“The level of the dollar in particular, is not helping the sustainability of future growth, and brings with it additional economic risks.”
Bollard also stated that the forecast recovery is based on easing in financial conditions. Given that exchange rate and wholesale interest rates are higher than forecast, “the forecast recovery could be put at risk.” If this continues, Bollard says that policy settings would be reassessed.
So, while Bollard anticipated that the OCR will be kept at these levels until well into the later part of 2010, he also left the door slightly open to the possibility that he could reduce it of things do not change and assist the much desired economic recovery.
In short, hold onto your seats – the bumpy ride will continue for a while yet.
Peter Curnow is an Adviser with Searells Financial Services Limited, a part of
Searell and Co Limited – Chartered Accountants and Business Advisers.
A copy of his Adviser Disclosure is available free of charge upon request and can be viewed at www.searells.co.nz.
This article is general in nature and should not be regarded as specific investment advice.
