Bollard balancing act predictable

By Peter V O'Brien

Friday 17th September 2004

The increase in the Reserve Bank official cash rate (OCR) was the worst-kept economic policy "secret" of the year.

Everyone with the remotest interest (pun unintended) in such matters knew it would go up, the only unknown being the exact increase, although most observers and commentators expected the eventual 6.25%.

Universal expectation of a rise made nonsense of MPs' and media purported shock at Finance Minister Michael Cullen's supposed "gaffe" (a word used in the press) in Parliament on September 8 when he referred to the next day's announcement of a higher OCR.

Expectations had earlier affected yields on fixed-interest securities. Yields on 90-day bank bills, on July 2009 and April 2013 government stock and on a one-year retail deposit with major trading banks are in the table. The figures are taken at quarterly intervals and at September 10. They therefore fail to show what happened in the rundown to Reserve Bank governor Alan Bollard's formal announcement.

Yields on 90-day bank bills closed August at 6.51%. They rose every trading day between September 1 and 6 before settling at the latter date's 6.58% on September 7 and 8, just before Dr Bollard's statement.

There would also be little surprise if the OCR was lifted again before the end of the year, because the latest rise was unlikely to remove the bank's perception of heat in the economy putting pressure in inflation. That would mean the usual bad news for people with floating interest rate mortgages and good news for those invested in retail deposits, assuming the latter had maturities after a higher OCR.

Much was made of a likely fall in house prices and a decline in residential housing starts immediately after the rate increase. That was a logical and valid reaction, particularly from people with interests in the house building industry, property investment, real estate agents and those wanting to sell a current dwelling.

It also reflected the Reserve Bank's need to perform an economic balancing act that involved controlling inflationary pressure, the impact of a rise in the exchange rate and overall economic growth.

Exporters have again complained about the New Zealand dollar's recent movement against other currencies, particularly the US and Australian dollars. The kiwi was worth 65.23USc on Friday September 10 and 94.73Ac. Comparable rates six months earlier (March 10) were 67.42USc and 89.12Ac but indications last week were that the rate against the US dollar could push to 70USc and possibly higher.

Talk of imminent parity with Australia could be premature and an overstatement, although last Friday's rate was the highest since our currency floated in 1985.

Rising interest rates make investment in New Zealand securities more attractive to overseas investors, putting more pressure on the exchange rate, subject to Australians and Americans making the necessary tradeoff calculations between interest rates in the respective countries and the dollar's value.

New Zealand businesses seeking debt finance could benefit from international relationships subject to the merits or otherwise of hedging. Those decisions depend on the nature of the business and sophisticated analysis of probable currency movements.

The elections in Australia and the US are complicating factors in international assessments. Anything could happen in the US, given the experience of 2000, when President George W Bush gained the White House with a minute number of the plurality vote and a narrow margin of Electoral College votes, the latter depending on convoluted legal arguments about the vote count in Florida.

Anyone who downplayed the international effects of a US election, which included the biennial vote for the whole of the House of Representatives and one-third of the Senate, as well as the presidency, would be foolish.

Even intensely populist New Zealand television gives it solid coverage. Some New Zealand-based experts might have doubtful claims to detailed knowledge but regular comments from US analysts and commentators make up for that.

Australia's federal election on October 9 is also important for New Zealand. A return of the coalition would probably mean business as usual. Election of the Labor party would be seen in some places here as a likely closer relationship, given resultant left-of-centre governments in each country.

People who thought that way should remember Australian governments of any colour do what they perceive as best for Australia, irrespective of relationships with New Zealand.

The outcome of the Australian election has one certainty. Interest rates would rise when the Reserve Bank of Australia lifted its OCR, leading to a lower NZ/Australian exchange rate and helping exporters.

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