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Fletcher Energy sale should boost kiwi dollar

Friday 1st December 2000

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Interest rates began the year relatively low, rose until mid-year, then retreated slowly until reaching the figures shown in table IV for November 20.

They moved earlier in the year in line with changes in the official cash rate (OCR), the rises being seen particularly in the retail deposit figures for registered banks and large financial institutions.

These need to be treated cautiously because they alter marginally as the securities get closer to maturity, particularly relatively short-dated stock.

The marginal effect lessens when the market is dealing in stock with long maturities. There was nothing strange about the path of interest yields during the year. Market observers were virtually unanimous in picking what the Reserve Bank would do with the OCR, and the wholesale and retail rates reflected the OCR changes.

Rising interest rates put more pressure on consumer spending, affecting people who had floating mortgage rates. Conversely, these people benefit when rates drop, while those with fixed rates are left with the same outgoings.

Another point is worth repeating in the context of retail interest rates rising during the year. More money is lent to financial institutions than borrowed from them and it is immaterial that one house mortgage may involve more dollars than several individuals' total deposits or other monetary investments.

An example has been used before in The National Business Review. An individual may have a house mortgage of $100,000 while five people have total deposits, debentures or other non-equity investments of $20,000 each.

The total amount is the same in both cases but more people are involved when institutional borrowers increase the rates they pay. Lenders to institutions gain when rates go up and borrowers (mortgage holders) pay more.

Timing is obviously important in relation to the rollover of deposits and debentures and to mortgage arrangements, but this year there were pluses and minuses for both sides of the interest rate equation.

What happens in 2001 will depend on the Reserve Bank's approach to the OCR, inflation and other economic matters.

One factor is often overlooked if people are not close to the trading market. International players buy and sell New Zealand debt securities and, as in the case of the currency, are not above speculating for or against our securities.

The oft-referred to "Belgian dentists" have held swags of New Zealand euro bonds. Those securities fall due periodically and influence the local market.

Exchange rates have played a part in such exercises and will continue to do so. As always, there is a counter.

While there may be more trading or speculating in a currency than the total of "real" international transactions in goods and services in a given period, there should be New Zealand demand for New Zealand dollars at the conclusion of the Fletcher Challenge Energy sale.

Much of the payment will be in US dollars and New Zealand shareholders, particularly institutional shareholders with an eye on the exchange rate, may be preparing themselves in advance.

While that is a relatively minor element in what happens to the New Zealand currency and our interest rates it has to be weighed against the fact that much of what happens in the deregulated economy is generated, for good or ill, overseas.

There will be no attempt to change that situation in 2001, so we can expect the usual fluctuations in interest rates on a securities' supply and demand basis.

In the longer term, the government's proposed revamp of the New Zealand superannuation scheme could affect interest rates.

The fund - initially small - will invest part of its assets in New Zealand fixed-interest securities.

Yields in that context have little to do with the regular interest payments. Fund managers run fixed interest portfolios on the basis of movements in yields that affect the capital gain or loss on the underlying securities.

Interest rate movements in 2001 should have a greater impact on individual investors than institutions, or major wholesale borrowers, provided the two latter classes have the prudence to use the range of derivatives to hedge their potential risks.

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