Welcome to the February 21 2008 editions of the BNZ Weekly and Offshore Overviews.
The main thread of discussion around the world this week has been about inflation. The US rate has lifted to 4.4%, China's inflation rate is now 7.1%, the EU rate is well above the 2% target at 3.2%, and Australia's underlying rate is above 3.5%. The European Central Bank has again warned about inflation risks with the Bank of France Governor even describing the recent large Fed. rate cuts as excessive. The Bank of England continues to worry about price rises while across the Tasman the Reserve Bank of Australia is leaving the market in no doubt about what they will do with interest rates in the near future.
In this sort of environment it is unsurprising that wholesale interest rates have risen here and overseas during the week. The NZD has also risen to above US 80 cents for a while assisted by the Aussie currency being boosted by expectations of interest rate rises along with improving commodity prices. There was even some buying in response to the US sharemarket rising overnight in spite of consumer confidence falling to a 16 year low earlier in the week.
Major uncertainty continues about the health of the US financial system with increasing signs of a credit crunch around the world. This brings downside risks quite obviously but estimating any magnitude or longevity is impossible. Continued volatility in exchange rates, equity prices, commodity prices, and interest rates is likely. And unless we see substantially worse data on the NZ economy than we are seeing and actual recession in the US with either Japan the UK or Europe joining in, the chances seem strong that our currency and interest rates will remain firm all this year before edging lower over 2009.