Daily Briefing, Friday February 08, 2008

Firstly, let's look at the interest rate outlook in New Zealand after some key data on wages and employment came out this week.
It's important because the balance of opinion has shifted more towards a rate hike later this year rather than a rate cut.
The interest.co.nz consensus view on official interest rates is that the official cash rate (OCR) is on hold for now at 8.25%, but that the risk of a change later in 2008 has shifted more towards a rate hike than a rate cut.
Data on Tuesday showing record annual wage inflation of 3.4% and data on Thursday showing seasonally-adjusted unemployment at a record low of 3.4% .
This is reinforcing fears about inflation pressures.
The wholesale money markets are currently predicting that the OCR will be 8.75% within 90 days.
Wholesale interest rates for the 2 year swaps market have also risen 20 basis points or so in the last couple of days. This is the wholesale rate that the banks base their all-important fixed rate mortgages on.
Early in January three of the big four banks tried to lift the 2 year fixed mortgage rate by 20 basis points to 9.6. When ASB and Kiwibank baulked at the big increase, the banks had to drag that rate back down to 9.5%.
But the latest increase will start some bank asking questions about whether they need to hike their fixed mortgage rates.
However, the Reserve Bank New Zealand will be swimming against the trend in the northern hemisphere if it does hike rates later this year.
The Bank of England cut its benchmark official interest rate by 25 basis points to 5.25% on Thursday. This increased New Zealand's interest rate advantage over British rates to 3%. The Bank of England said Britain's economy was slowing and credit conditions had tightened.
Also in the north, the European Central Bank reversed its view on the outlook for its monetary policy. ECB President Jean Claude Trichet signalled he was open to cutting interest rates in the Eurozone for the first time in 5 years. As recently as last month the ECB was saying the risks of inflation outweighed the risks of a recession and was hopeful growth in Asia and Europe would be enough to cushion the impact of slowing US growth.

But in the south, expectations of a rate hike in Australia have firmed up in the last week since it increased official interest rates.
A survey by Bloomberg.com has found that 13 out of 24 economists expect the Reserve Bank of Australia will have to raise interest rates again by June. This is up from 7 economists a week ago who thought the RBA would hike its official interest rate another 25 basis points to 7.25%.
This would make the New Zealand official cash rate only 1% above Australian rates, but it would reinforce the view of international investors that the Australasian currency block has a wide interest rate advantage over falling rates in Europe and the United States.
It would, in theory, give Reserve Bank of New Zealand governor Alan Bollard some company if he decided to raise rates here. Bollard has said he is watching Asia and Australia particularly closely.

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