Friday, May 26, 2023

Point of Order: Plenty to ponder on economy......

.....while OCR stance softens, a widening current account deficit threatens NZ’s credit rating

It’s been an eventful week for the New Zealand economy. On one side, the Reserve Bank was seen as putting the brakes on the Official Cash Rate, with a 25 basis points increase heralded as good news for mortgage-holders. On another, NZ’s record current account deficit is seen as posing a real threat to NZ’s sovereign credit rating.

The current account deficit, reflecting we’re spending more than we’re earning overseas, rose to its highest level ever of $33.8bn last year. As a percentage of GDP, a measure of its significance in the context of NZ’s overall economy, it weighed in at 8.9%, the highest it has been since the 1970s.

Could it get worse before it gets better?

The news media have been preoccupied with the interest rate issues. Where previously, a rate hike to 5.5% this month in the OCR was expected to be the peak for the cycle, there were growing expectations we’d see the rate move as high as 6%.

The Reserve Bank’s decision to hike the rate by 25 basis points, while largely in line with expectations, unleashed a “crazy” response in the nation’s dealing rooms as it was far more dovish than expected.

Soon after the 2pm release, the NZ dollar was down by three-quarters of a US cent and wholesale interest rates were off sharply.

The big surprise, according to the NZ Herald, was that the bank had called the peak in the OCR at 5.5%.

“It’s crazy, as you would expect,” Westpac senior market strategist Imre Speizer told the Herald.

“It’s a very dovish surprise in the OCR track. The 25 basis point hike was not a surprise – that was fine.It was the retention of the 5.5% forecast peak.

“In other words, they are signalling that they have completed the cycle. It’s over. And that was a major surprise for the market as most had expected more rate hikes to come.”

By mid-afternoon, the New Zealand dollar was down at US61.85c from US62.48c just before the release.

In the interest rate markets, the response was huge. The two-year swap rate fell sharply to 5.19%% from 5.55% while the 10-year swap rate was at 4.37% from 4.53%.

In bonds, two-year Government yields fell to 4.79% from 5.13% and 10 year bonds were at 4.30% from 4.45%.

That should all add up to downward pressure on fixed rates – good news for mortgage holders.

According to Luke Malpass, political editor of The Post, the hike didn’t realise the worst fears of Labour Party strategists. In fact, quite the opposite, he said.

Governor Adrian Orr reckoned the government had been “more of a friend than foe” for monetary policy. Not only that, the RBNZ’s monetary policy committee had to hold its first vote on a rate decision rather than reaching consensus.

Orr told his news conference of a number of areas where RBNZ saw inflationary pressures starting to ease (though he affirmed there would be no cutback in the OCR till the third quarter of 2024).

On the issue of NZ’s current account deficit, last month the International Monetary Fund released its world economic outlook.

Guess what? NZ’s current account deficit at 8.9% of GDP was the largest of any advanced economy with the possible exception of Greece.

The IMF is projecting that the deficit will stay elevated at about 8.6% of GDP in 2023. That would make New Zealand the worst performer on this particular metric.

Not much to cheer about, there.

Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton

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