INTEREST RATES
Given the way the data have fallen over the past week it remains reasonable to continue to expect
wholesale interest rates to slowly drift higher in coming months.
Early this week we learnt two important things. First, as discussed in depth in our Housing section, house
prices are now officially rising again in New Zealand. They gained 1% in July and 2.2% in the three months
to July. The time taken to sell a dwelling is now the best compared with average since late-2007, and
anecdotes continue to bespeak of listings shortages. This means prices are likely to continue to creep up.
This development is important because we Kiwis pay close attention to house price movements and the
gains in prices fairly much wipe out concerns some will have been having about rising unemployment being
the key determinant of house price changes and everything else in the economy. As we have pointed out,
the labour market lags the economy, it does not lead it. That means if you forecast the economy on the basis
of what the labour market is doing you are actually looking backward rather than forward.
The other large piece of news was retail spending growing in seasonally adjusted volume terms by 0.4%
during the June quarter This is still a weak result by historical standards but better than the 0.2% decline
expected in the markets and the strongest result since the March quarter of 2007 (when sales ballistically
soared 3.7%!).
The data come in a week when we have also learnt that the EU economy shrank only 0.1% during the June
quarter with France and Germany each growing by 0.3%. Japan also grew 0.9% during the June quarter.
The results add up to further support for the global recovery story therefore further upward pressure on
share prices, growth and risky currencies like the NZD and AUD, and of course interest rates. But rate rises
will not be linear. There will be substantial reversals at times as doubts occasionally appear about the
strength of the economic recovery. In particular one must be wary of the impact which the unwinding of
unsustainably stimulatory fiscal and monetary policies will have next year and through 2011.
In fact those concerns have dominated this week with the result that after initially jumping skyward wholesale
interest rates have finished today down very slightly from where they were a week ago. The one year swap
rate is near 3.15% from 3.20% last week and 3.15% a month ago. The three year rate is near 4.80% from
4.85% last week and 4.70% four weeks ago. The five year rate is near 5.45% from 5.50% and 5.45%.
Key Forecasts
• No more monetary policy easing this cycle.
• Medium to long term housing rates have seen their multi-year lows – stop-start rises now lie ahead.
Speed unclear.
Given the way the data have fallen over the past week it remains reasonable to continue to expect
wholesale interest rates to slowly drift higher in coming months.
Early this week we learnt two important things. First, as discussed in depth in our Housing section, house
prices are now officially rising again in New Zealand. They gained 1% in July and 2.2% in the three months
to July. The time taken to sell a dwelling is now the best compared with average since late-2007, and
anecdotes continue to bespeak of listings shortages. This means prices are likely to continue to creep up.
This development is important because we Kiwis pay close attention to house price movements and the
gains in prices fairly much wipe out concerns some will have been having about rising unemployment being
the key determinant of house price changes and everything else in the economy. As we have pointed out,
the labour market lags the economy, it does not lead it. That means if you forecast the economy on the basis
of what the labour market is doing you are actually looking backward rather than forward.
The other large piece of news was retail spending growing in seasonally adjusted volume terms by 0.4%
during the June quarter This is still a weak result by historical standards but better than the 0.2% decline
expected in the markets and the strongest result since the March quarter of 2007 (when sales ballistically
soared 3.7%!).
The data come in a week when we have also learnt that the EU economy shrank only 0.1% during the June
quarter with France and Germany each growing by 0.3%. Japan also grew 0.9% during the June quarter.
The results add up to further support for the global recovery story therefore further upward pressure on
share prices, growth and risky currencies like the NZD and AUD, and of course interest rates. But rate rises
will not be linear. There will be substantial reversals at times as doubts occasionally appear about the
strength of the economic recovery. In particular one must be wary of the impact which the unwinding of
unsustainably stimulatory fiscal and monetary policies will have next year and through 2011.
In fact those concerns have dominated this week with the result that after initially jumping skyward wholesale
interest rates have finished today down very slightly from where they were a week ago. The one year swap
rate is near 3.15% from 3.20% last week and 3.15% a month ago. The three year rate is near 4.80% from
4.85% last week and 4.70% four weeks ago. The five year rate is near 5.45% from 5.50% and 5.45%.
Key Forecasts
• No more monetary policy easing this cycle.
• Medium to long term housing rates have seen their multi-year lows – stop-start rises now lie ahead.
Speed unclear.
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