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Bollard has to manage expectations on extent rather than timing of rate hikes, says AXA

Tuesday 23rd March 2010

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New Zealand’s Reserve Bank has clearly switched from managing expectations around the start of its monetary tightening to the extent of its tightening, AXA Global Investors said in its quarterly strategic outlook. 

AXA’s chief economist Bevan Graham is expecting the RBNZ to increase the official cash rate in June, but “of more interest than when the increases start will be the pace of the increase and indeed the extent of the tightening cycle,” he said. Bollard’s workload may be lightened by the requirement on banks to have more deposits in relation to loans, which has the effect of driving up borrowing costs for households.

Proposed reforms of tax, which may lift the rate of GST, would also have the effect of keeping a lid on growth. 

“If the recovery in New Zealand continues to be driven by net exports, if investment remains strong, if consumption remains strong, if consumption lags rather than leads the recovery and only picks up on the back of greater productive effort and if the housing market becomes driven by demographics rather than investor-led speculative activity, then we might see a lower neutral interest rate and more subdued interest rate cycle,” Graham said.  

The Reserve Bank should tighten monetary conditions in 0.25% “chunks,” he said. 

“This means with eight opportunities to raise interest rates in the next 12 months, we would see the OCR at 4.5% by mid 2011,” he said. “At that point the bank could then afford to pause and take stock.” 

In its recommendations to investors AXA’s head of investment strategy Keith Poore said that it now favours equities ahead of bonds.

As markets recover, and corporate profits rise, investors can afford to add a little more sovereign risk insurance to their portfolios, and emerging markets are AXA’s preferred asset class. 

The outlook for New Zealand company earnings doesn’t look as good as Australia’s, despite Kiwi firms feeling particularly upbeat at present about profit expectations, Poore said. 

“Unlike Australia, the New Zealand stock market has little direct exposure to higher commodity prices and with domestic consumption expected to be subdued, so too will company earnings,” he said.

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