Last month the Governor of the Reserve Bank announced the
overnight cash rate (OCR) would remain unchanged at 3.5%. There were no
surprises in that, but the commentary surrounding the six weekly review was
less bullish about the next change being a rise.
Dr Wheeler said, "The timing of future adjustments in
the OCR will depend on how inflationary pressures evolve in both the non-traded
and traded sectors. It would be
appropriate to lower the OCR if demand weakens, and wage and price-setting
outcomes settle at levels lower than is consistent with the inflation target...
The Bank expects to keep monetary policy stimulatory, and is not currently
considering any increase in interest rates."
The possibility of lower interest rates for longer has
intensified competition in the banking sector. The Co-operative Bank recently
reduced its 18-month fixed rate mortgages from 5.49% to 4.99%, and both Kiwibank and ASB have cut their
three-year rates to 5.39%.
The underlying message is banks want your business so don't
be afraid to negotiate. If you are not getting the best rate, ask your bank to
match it, and if you are a good customer you should be getting a better deal
than their advertised rates.
The economy itself is a dichotomy, or a trichotomy: Auckland,
Christchurch, and everywhere else.
Auckland is experiencing its own property bubble, driven by
constrained land supply and high demand for housing by immigrants. It is also now
being driven by a significant speculative element which is creating increased
concern. A sure sign of the bubble was
an article appearing in a recent property magazine about a young chap who is
making his fortune with a strategy of putting $5,000 down on a yet to be built
house and on-selling before final settlement is due on completion. Having made
$20,000 on the first deal, he has scaled up with three more $5,000 deals. This
scenario invariably ends badly for those who join the racket near the end of
the cycle. Like the kids party game pass the parcel, they end up holding the
parcel when the music stops - in the property game it’s a large parcel of debt
they are unable to repay. Some are getting wise to the risks in the market and
now looking for investment opportunities elsewhere, but this has not yet gained
sufficient traction to ignite provincial property prices and counter the
economic headwinds.
In the rural areas farmers are doing it hard. Fonterra has
again cut the forecast farmgate milk price, this time from $4.70 per kilo of
milksolids to $4.50. With a forecast dividend of 20 to 30 cents a share, the
cash payout for the season is likely to be no more than $4.80, compared to a
total payout of $8.50 per kilo of milksolids last year. It is expected that
most farmers will have negative cash flow and will be forced to cut spending.
How tightly farmers are gripping their cheque books will become evident at the
annual Mystery Creek field days on 10-13 June.
For regions like Northland and Gisborne the news is worse as
export log prices have fallen to a seven-month low. The average wharf gate
price for New Zealand A-grade logs fell to $94 a tonne in April, from $106 a
tonne in March. According to AgriHQ log piles on Chinese ports are reportedly
close to 5 million cubic metres, more than double the normal level of around 2
million cubic metres. That excess stock is likely to take about a year to clear
so low prices are likely for some time yet. The value of log exports slipped 13%
to $3.5 billion in the year through March.
With lower dairy and log prices, it comes as no surprise that
the government's books will not end up in the black for the current year as had
been forecast, with much fanfare, in last year's budget. What was a $372m
surplus is now likely to be a deficit of around $600m - a $1 billion
turnaround. Clearly the lower tax revenue from the primary industry sectors is
flowing through to the government coffers. .Finance Minister Bill English said
this will not affect the government's spending programmes but will affect the
debt repayment schedule, debt which was largely accumulated as an economic
stimulus measure since the global financial crisis in 2008.
This year's budget will be presented to Parliament on
Thursday the 21st of May. A small surplus is projected for the 2015/16 year.
Clearly there is a lot riding on the primary sector - for
central government and local economies.
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