Economic Weekly: Are we going the right way?

Financial markets are nervously awaiting the Reserve Bank’s policy decision on Wednesday afternoon. ‘Nervously’ because it’s been a long time between drinks. The last such decision was on November 11. More importantly, a lot has happened in that time. The global vaccine roll-out has begun in earnest, global inflation is ‘a thing’ again, NZ economic activity has clearly exceeded RBNZ expectations and…NZ house prices have risen another 8%.

All of this has led to some big changes in market pricing. Negative rates chat has been shelved and yield curves have risen and steepened everywhere as markets around the world have looked ahead to a COVID-less world. Local wholesale interest rates are between 10 and 90bps higher than November. The currency is about 4% stronger.

But investors are now wondering whether the RBNZ will entirely share this upbeat assessment. After all, financial markets and the central bank have not always seen eye-to-eye in the past when it comes to assessing the run of the economic green. It’s about validation – akin to my toddler racing up a side street on her bike, before checking herself and throwing back a look of “Am I going the right way?”

An inclination from the RBNZ to play conservatively – more Kane Williamson than Brendon McCullum – risks some reversal of the recent big lift in wholesale interest rates and NZD/USD. Our view, outlined in our preview, is that the Bank’s emphasis will be more on the downside than the up. COVID is a marathon, not a sprint.

But the Bank will have to acknowledge and upgrade its economic forecasts to reflect the stronger run of data since November. And, whatever the wash-up on the day, our view is that the trend has indeed turned. We now expect the first OCR hike next year. Our updated interest rate forecasts have the recent uptrend (slowly) continuing. The risk profile facing the currency is similar – see the Special Topic of our latest Corporate Hedging Toolbox. The point for Wednesday is that there is more potential for volatility than usual, something for risk managers to bear in mind.

Finally, all of the above seems a little inconsequential given today we mark ten years since the devastating 2011 Canterbury earthquake. Our thoughts are firmly with the people of Christchurch and all those affected.