The highlight of the week was the inaugural issue of Local Government New Zealand (“LGFA”) bonds to the market.

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The evidence continues to accumulate that most economic forecasters and the RBNZ will underestimate the strength of NZ economic growth this year.

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The risk of the RBNZ underestimating stronger economic growth is a real one.

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Another week has gone by and the local interest rate market is back into debating how the NZ economy will perform this year

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Market attention this week will be centred on Governor Bollard’s view of the global and NZ economic outlook with the OCR review on Thursday.

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The question is will global investors continue to buy our bonds when they have finished with their selling of European bonds?

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Forecasts from economists on how the economy performed in the second half of 2011 have been very changeable over recent times.

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Last Thursday’s RBNZ Monetary Policy Statement was arguable somewhere in between my “outrightly dovish” and “less than dovish” scenarios

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RBNZ Governor Alan Bollard has a real toughie this week with the Monetary Policy Statement

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Does the general election result change anything in terms of the outlook for future interest rate movements?

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Whatever the offshore and domestic economic prognosis, it appears that our inflation risks have reduced

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The current market pricing reflects an extraordinarily pessimistic view of the global economy from here.

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The profit margins of the Aussie banks who dominate the New Zealand banking market seems to be the major topic of discussion in the financial and economic media at the moment.

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Why specifically mention interest rate increases at this point in time (even if it is conditional) if all it will do is push the NZ dollar higher?

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The latest ructions and turmoil in European economies and financial markets do have direct implications for corporate borrowers in New Zealand.

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There is never any commentary or recommendations on the level of competition in the economy.

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Borrowers and investors can expect very little change to market interest rates in New Zealand over coming weeks and months.

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It is a very strange world when changes to credit margins (spreads) are having a much larger impact on overall cost of borrowing than changes to the underlying market interest rates.

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There are two possible scenarios for our interest rate markets over the next 12 months in terms of rate direction and yield curve shape:-

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Governor Bollard heavily influenced the first part of the monetary policy statement which was correctly downbeat due to the uncertainties from the recent global market turmoil.

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All eyes are this week on the RBNZ’s updated outlook for the NZ economy due out in the monetary policy statement on Thursday.

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I did expect that strong investor demand, starved of other fixed interest investment opportunities at this time, would swamp the Air New Zealand $150 million corporate bond issue.

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It is unlikely that both NZ short-term and long-term interest rates will move any lower from the current levels

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 2012 GDP growth forecasts have to be nearer +1% than the previous +4.5% forecasts.

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The international events of the last two weeks have all combined to make the local interest rate outlook cloudier than ever. 

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The domestic economic landscape may not have changed too much for interest rates over the last few weeks; however the external terrain is rocking and rolling in a way that Christchurch folk are all too familiar with.

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Last week’s OCR review statement from the RBNZ has been criticised in some quarters for being too “wimpish”

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The local interest rate markets will be focusing on every word uttered by the RBNZ Governor at this Thursday’s OCR review.

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Who would want to be in Alan Bollard’s shoes right now? Damned if he does and damned if he doesn’t.

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The moneymarkets will be focusing on retail, housing, manufacturing and GDP growth data releases this week and the CPI for the June quarter being released next Monday. All the figures should confirm why the RBNZ is right to be concerned about future inflationary pressures building up in the economy.

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They say that “a week is a long time in politics” – it is an even shorter time in the wonderful world of bond and interest rate markets.

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There has been much analysis and debate in New Zealand over the last six months as to why this economic recovery out of recession back to positive GDP growth is fundamentally different to all other economic recoveries.

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The moneymarkets continue to price future NZ interest rate levels well below what the RBNZ project

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Three year fixed-rate money (three-year swap rates) at 3.80% looks startlingly and artificially cheap against this scenario of stronger growth and an annual inflation rate above 3.00%.

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A good number of local economists continue to have a view that the NZ economy is really struggling and the media lap-up their various woes of pessimism.

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Does the reasonably “fiscally tight” budget from the Government provide Alan Bollard with more leeway with monetary policy settings over the next 12 months?

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All quiet on the western-front as far as the short-term interest rate market is concerned in New Zealand.

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Will the New Zealand interest rate yield curve be as steeply upward sloping in 12 months time as it is now?

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Two pieces of economic news last week support my view that the export-led recovery in the NZ economy is already well underway

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The OCR review this Thursday by the RBNZ will not shed much light on the likely timing of interest rate increases from the current “super loose” monetary policy settings.

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Inflation figures released this morning (+0.8% for the quarter and +4.5% for the year) confirm some of the challenges ahead this year for households, business firms and our managers of monetary policy, the RBNZ.

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Long-term (10-year) swap interest rates have increased 0.30% from 5.05% to 5.35% since the dip in yields caused by the Christchurch and Japanese earthquakes.

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Local borrowers and investors alike are well advised to keep their eye firmly on market movements in the one to three year wholesale swap interest rates as lead-indicators of what kind of increases they can expect in 90-day rates over coming years.

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The consensus view amongst the local economist fraternity and moneymarket pricing is that short-term interest rates will move across the page for the next nine months

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Whilst NZ interest rates look set to be stable at current levels for most of this year, the reality of life is that nothing ever stays static

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Fixed interest investors who have been investing their funds in short maturities to benefit from higher short-term and long-term market interest rates later this year, have just experienced a sharp lesson in “event risk”

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Given the amount of market, political and media pressure on the RBNZ it appears inevitable that they will oblige with a 0.50% cut in the OCR to 2.50% this Thursday. 

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The current picture and outlook for interest rates has changed dramatically as a result of the Christchurch earthquake disaster.

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“Learn from your mistakes” is what we all tell our kids – which as we know doesn't always work 100%!

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Whether you believe that the moneymarkets and/or the RBNZ will be forced to alter their current view on the timing of OCR increases this year comes down to how well the economy performs in the first half of 2011.

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The New Zealand interest rate yield curve is going to get steeper in slope over coming months (long term rates up, short-term rates stable) before we see any other change to its shape.

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The change in wording and tone in the RBNZ OCR review statement last week to a more positive outlook for the economy this year indicated it needs to rectify the jam they have created for themselves.

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The OCR is reviewed again by the RBNZ this Thursday and again there will be no change.

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The local interest rate market commences a new year with very little change to outright rates and yield curve shape from the levels of late December.

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Here are eight interest rate questions to ponder over the beach, beer and BBQ holiday period:- 

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RBNZ Alan Bollard delivered a monetary policy statement bank in line with expectations i.e. downbeat, cautious and dovish on the economic outlook.

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The RBNZ Monetary Policy Statement this Thursday may surprise the financial markets in being somewhat more “dovish” on the outlook for the economy next year.

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The local interest rate market priced short-term swap rates marginally lower last week

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The “window of opportunity” that has been open for corporate borrowers over recent months to fix the interest rates on their debt for as much as they could, for as long as they could, started to close last week.

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It is a busy week ahead for the moneymarkets to interpret the various releases of domestic economic data...

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There are several reasons behind the increase in market interest rates over the last two weeks and investors/borrowers should expect that there is more to come.

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Unexpected developments in the wholesale swap market last week saw interest rate yields increase across the curve.

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The sideways trend continues in the New Zealand interest rate markets and both borrowers and investors can expect this to continue over coming months. For the meantime the flat domestic economic data supports the RBNZ stance, however monetary policy is not managed on current data, it must be based on the forecast economic conditions in 12-18 months time and the inflation pressures that will come off those future conditions.

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Media reports and bank commentaries on the outlook for monetary policy/interest rates are universal in the view that the RBNZ will not have to adjust the OCR upwards until March 2011 at the earliest and after that the 0.25% increases will be few and far between. That’s how the scenario looks now after several months of weak domestic economic data and several economic forecasters giving a reasonable probability of the economy falling back into recession.

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 It is shaping up to be a very quiet period indeed in the local interest rate markets over coming months. The largest moves that will affect borrowers and investors may well be changes in credit spreads as US investor price NZ corporate debt at a different level (i.e. lower) than what local bank and retail investors have been commanding over the last two years.

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Given the RBNZ current stance towards the NZ economic outlook and thus monetary policy settings, the next few months are going to be very uneventful in the interest rate markets.

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One can see it happening already, the RBNZ keep interest rates “too low for too long” over the next six months and leave themselves behind the 8-ball...

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The Reserve Bank’s sudden downshift in their forecast for economic growth in 2011 has many pundits speculating on what the track of market interest rates will be for the next 12 months.

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The interest rate markets may take a few days to assimilate what the dramatic Christchurch earthquake means for that regional economy, businesses, local government and central government.

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Monetary conditions in the New Zealand economy are determined by where actual market interest rates are being priced between investors and borrowers.

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