General | Feb 03 2006
In sporting terms an assist comes from helping a teammate score a goal, so the New Zealand Reserve Bank (RBNZ) was the economic beneficiary of two assists in March.
The equity market enjoyed its biggest monthly gain in 15 years, rising more than 8.5% thanks in part to an increase in corporate activity. At the same time, the New Zealand currency weakened against the US dollar, helping improve the general level of business confidence in the economy.
HSBC’s economics team notes the combination of factors was a good one for the RBNZ, as the weaker currency helps rebalance the economy by lifting exports but making imports more expensive and so curtailing domestic demand, while at the same time limiting house price inflation.
As a result it suggests the RBNZ’s goal of slowing the economy appears to be working, as it estimates both domestic demand and consumer spending will weaken over the year, though inflation is expected to move higher and the impact on GDP growth is predicted to be fairly minimal.
The bank suggests the limited GDP impact is partly because the current high interest rates are not having as strong an effect as suggested by the actual level of rates, with the 12% increase in housing sector consents in February evidence of this.
But the HSBC team takes the view the yield curve will flatten later in the year, meaning the impact of high interest rates will become more apparent in coming months.
This leads the bank to suggest official interest rates are likely to move lower later this year, its forecast for 3-month yields to average 6.75% this year compared to 7.6% last year.
It isn’t a timing view shared by all though, as Credit Suisse suggests while the RBNZ has softened its monetary policy tone any cut to official rates is more likely in 2007 than this year.
GSJB Were agrees, the broker having originally forecast a decline in rates beginning in September this year, but cautioning such action may now be pushed back several months.
