BNZ Weekly Overview - Jan. 20
The key points of this week's publication include the following.
Please note that because of Summer holiday (and sunshine) requirements there will be no Weekly Overview next week.
This week we received further information showing why we think forecasters calling for the Reserve Bank to ease monetary policy mid-year are over-optimistic and why there is a good chance the official cash rate will need to be raised 1-2 more times before the middle of this year and no cut is likely until March quarter 2006 at the earliest.
- The NZIER released their Quarterly Survey of Business Opinion. It showed record tightness in the labour market, record capacity utilisation, firm expectations of good trading conditions, and few worries about customer shortages. The survey suggests accelerating wages growth plus cost pressures from capacity constraints generally.
- The inflation rate rose to 2.7% last year from 2.5% in the year to September and 1.6% over 2003. The result was 0.2% higher than the RB were expecting and even included a 0.7% rise in traded goods prices - not what one would expect with a rising currency.
We maintain our warning about rising floating interest rates and the attractiveness of getting some fixed rate cover on board on rate dips.
Next Thursday the RB review their cash rate. A rise is possible but in the absence of an increase it is mainly the strength of their warning about inflation pressures which we will be interested in. Watch for further back-tracking from their misplaced October 28 optimism - after all, we struggle to generate a weak profile for the NZ economy this year.
What with the tightest labour market for 1.5 generations underpinning consumer spending and housing, businesses boosting capital spending to raise productivity, infrastructure spending, a near certain fiscal easing to curtail the surplus blow-out, over 72% of housing borrowers enjoying fixed rates and being unaffected by floating rate rises, plus trading partner growth equal to the ten year average and commodity prices still being supported by firm Chinese growth plus special factors like BSE in Canada.
What could upset the cart? Watch for a blow-out in the current account deficit (exports less imports) to the worst levels since not just 1997 (7% of gross domestic product), but maybe 1986's 8% come 2006. It's 5.8% at the moment.
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