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January 07 |
Hi John,
Happy New Year.
In December the Reserve Bank held the Official Cash Rate at 7.25%. But Allan Bollard also issued a strong warning that further increases may be necessary depending “on economic outcomes and in particular the emerging trends in housing and domestic demand indicators.”
So coming up to Christmas the market was almost resigned to an interest rate hike by the end of the financial year, and possibly on 25th of January when the next review is due.
So what’s happened since then?
1/ The housing market remains strong with prices and sales continuing to rise. The national median house price has now hit $348,886 resulting in a 9.2% rise for the year. Latest figures show residential building consents were down 12% in November but non-apartment consents down only 5%. The volatility of this monthly figure questions the significance of the drop.
2/ Consumer and employment confidence are both up. The Westpac McDermott Miller Consumer Confidence Index released in December was up 8 points – the biggest quarterly gain in 6 years. The Westpac McDermott Miller Employment Confidence Index just released showed workers’ confidence has increased to levels last seen in early 2005. Intuitively you would have to say consumer demand has remained strong. It’s not as though the shops were empty before or after Christmas Day.
3/ Petrol prices have come down. The December CPI released today reflects this drop. Annual inflation is now under 3% - within the Reserve Bank’s guidelines. You’ll recall in the October newsletter I talked about the changes in the weighting of the CPI meant the index was more susceptible to changes in oil prices and less susceptible to the purchase cost of new buildings.
4/ The continuing strength of the NZ dollar helped avoid increases in import prices. There is no sign of any drop in the exchange rate – which almost hit U.S. 71 cents during the Christmas break, albeit briefly. Strong support for the issue of Uridashi, Eurokiwis and the carry trade because of the yield differential continues to dominate the purchase of New Zealand dollars. To see my September 06 newsletter on this subject CRTL click here http://www.globalpacific.co.nz/wa.asp?idWebPage=8635. Even if the Bank of Japan – as is expected - were to raise interest rates to 0.5% the difference between our rate and theirs still remains high.
5/Fixed interest rates here – driven by rising global interest rates – continue to rise. Since Christmas most bank and non-bank lenders increased their fixed rates.
Well what does all that mean in terms of “the emerging trends in housing and domestic demand indicators”?
Well you’d have to say the first two points given above would not make Mr Bollard very happy. And while oil prices might be down, the Reserve Bank will be aware that inflation excluding petrol remains at the top of its 1% - 3% target band.
My guess is the drop in oil prices, the continuing strength of the New Zealand dollar, and the increase in fixed interest rates will be enough to convince the Reserve Bank to hold the Official Cash Rate at 7.25%.
The Bank’s main worry continues to be the housing market – and the increased spending power it generates. And it’s questionable how much influence increases in the Official Cash Rate will have on this.
A recent ACNielsen survey revealed that 94% of those questioned said a 0.5% in the Official Cash Rate would have little or no effect on their spending. Of course 85% of residential mortgages are now on fixed rates and are not directly affected by changes in the OCR. But it seems remarkable that 95% of people on floating mortgages said that the increase would have little or no effect. That’s more than the 91% on fixed mortgages who said the same.
Note though that only 8% of those surveyed knew what the OCR was, 61% said they didn’t know, and 31% who said they knew, were wrong. It’s more likely that the expectation of gains in house prices and low unemployment are negating any effect increasing mortgage payments may have on spending.
Meanwhile overseas, inflation still remains a concern and interest rates are on hold or on the rise.
· The Bank of England surprised everyone last week when it raised interest rates from 5% to 5.25%. This is the third rise in five months. At 2.7% inflation is well above the target of 2% and the highest it has been for a decade. The fact the announcement came before the release of the quarterly inflation figures later this month has led some commentators to expect a nasty inflation number coming up. If so expect further rises.
· The European Central Bank kept its key Eurozone interest rate on hold at 3.5% following a 0.25% rise last month. But inflation remains a concern as the Eurozone economy expands. Its largest economy, Germany, grew at its fastest pace in 6 years during 2006. Many analysts believe the central bank will raise the cost of borrowing as early as next month.
· U.S. Fed is due to announce its interest rate policy on the 1st of February. No change is expected. The soft landing now being predicted in the U.S. points towards a possible reduction in U.S. interest rates later this year. This would narrow the gap between the U.S. rates and those of other central banks.
In all there is little likelihood of a reduction in interest rates anywhere in OECD countries in the foreseeable future. Although some commentators are of the view rates in most countries have now peaked.
So how does all this affect finance in New Zealand?
I’ve already said fixed rates are rising and most commercial lenders which base their rates on the swap rate have increased their fixed rates over the last two weeks. But traditional finance companies – which base their rates on cost of funds from the public – have kept rates pretty much the same.
What’s really interesting though, is the commercial finance companies here have been consolidating over the last few years resulting in little difference in lending criteria within lending groups. The lending criteria of banks have always pretty well been the same. And amalgamation and takeovers in the finance company sector have resulted in little difference there too.
The last real innovation in the finance markets was the introduction of low-doc residential loans some years ago - which of course everyone is doing now.
But now we’re starting to see some real competition between lenders leading to innovation and new products in the commercial loan sector. A number of finance companies are taking an effective “equity” position in commercial transactions. And we’re noticing a more “deal by deal” attitude as the companies compete for business.
It’s time to shop around.
I’ll be reporting on some of these changes in our new GLOBAL UPDATE email newsletter introduced last November. I hope to have the next one out within a week or so.
Cheers
JP
John Paine B.Sc. Dip BIA
Global Pacific Corporation Limited
112 Gladstone Road, Parnell,
P O Box 3229, Auckland, New Zealand
Phone 64 9 303 3700, Fax 64 9 303 3031
Mobile 64 21 902 004
Email john.paine@globalpacific.co.nz
Web site www.globalpacific.co.nz
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