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BNZ Weekly Overview

BNZ Weekly Overview

This Week’s New Stuff Unlike last week this past six days we have not received much new information on the state of the New Zealand economy apart from the quarterly inflation report and our own new BNZ-REINZ Market Survey.

The inflation number was marginally lower than expected at 0.8% for the quarter and 4.5% for the year with almost half the annual gain due to the one-off GST rise. The key point to note though is that inflation is at the average level of the past ten years in spite of near zero economic growth, above average employment, spare capacity in the economy, and a rising currency. Imagine what will happen next year when growth heads toward 4%, the unemployment rate veers toward 5%, and businesses look to rebuild margins which have been crimped since 2008.

This is why borrowers should not blithely sit back thinking they can enjoy the lowest floating mortgage rates in four decades for ever and ever. Monetary policy with a cash rate at 2.5% remains at an emergency setting and when circumstances are clear enough for the Reserve Bank they will move. What this means is that although we think floating rates will stay low until the turn of the year fixed rates will rise well before then.

For the moment there is probably enough uncertainty around the globe to keep fixed borrowing costs from jumping 0.5% in the space of a few weeks or days.

But at some point there will be a sizeable shift in these fixed borrowing costs and history shows it will be pure luck if we happen to guess when this will happen (apart from March 2009 when we partly caused it).

For business borrowers over the past month we have been suggesting locking in perhaps 20% - 40% of core debt at fixed rates in the 2-3 year period and we remain of that view. For home owners we are still of the view that floating is optimal, largely because in spite of the margins increasing there has not been a round of bank fixed rate cuts for the two year plus terms.

If I were presented with a two year fixed rate at 6% or a three year rate at 6.25% I would sacrifice my 5.59% floating rate to grab it. But barring that I would stay floating while keeping an eye on the swap rates to see when banks may start thinking about lifting their rates.

With regard to our new monthly survey of licensed real estate agents all people on the Weekly Overview emailing list will have already received a copy earlier today and we review the key results in our Housing section below. Suffice to say the results show little price action apart from in some parts of Auckland, but more buyers are coming out of the woodwork and it will be interesting to watch how the series we are developing change over time.

This week the following material has been added to This week we have added a paper examining the OECD Indicators of Product Market Regulation to see whether or not in relative terms we can still consider ourselves to have a deregulated economy. The answer is that we are deregulated but by essentially standing still for the past two decades other OECD economies have passed us by. We stopped leading the world in deregulation a generation ago.

Our monthly examination of the state of and prospects for the NZ labour market has been added to the website. In the report we note that job advertising is rising strongly and the labour market is continuing to tighten up even though the economy has recently shown almost no growth. Employers should pay close attention to this situation as we suspect labour availability will become a big issue next year. Our new monthly survey of licensed real estate agents reveals rising interest from buyers but a still large gap between price expectations of vendors and buyers. Auckland City and North Shore City however show evidence of upward price movement. Other Website Material • Situation and Outlook for the NZ Economy – seven pages of snippets and outlooks for specific variables and sectors. • Weekly syndicated newspaper column • Why Kiwis will be flocking across the Tasman • State of the NZ Labour Market • NZ Housing Construction Costs • BNZ-REINZ Market Survey • Archived Weekly Overviews


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