Hold your breath on the Dollar and see the cents of it

Tony Alexander Masthead Web

Inflation remains low in New Zealand at just 0.4% for the year to March.Low interest rate likely-Tony Alexander

There are a number of measures produced by Statistics NZ and the Reserve Bank of New Zealand (RBNZ) which try to get beneath the headline number to see what is really happening when one-offs are stripped out.

They are not as low as 0.4% but do tend to be clustered toward the lower end of the 1% – 3% target range for RBNZ.

That means we cannot really be justified talking in terms of a high risk of deflation in New Zealand. But it means, should a shock come along, such a risk is high and hence building an inflation buffer, RBNZ will probably ease monetary policy a couple more times this year, possibly in April and in June.

Lower rates

Lower interest rates will of course stimulate the housing market and most commentators now seem to have picked up on the point we were making frequently last year, a resurgence in house price inflation in Auckland and/or surging regional centre prices will probably prompt the Central Bank to widen its credit controls.

That may mean a 50% investor depositor requirement in Auckland and Auckland’s current 30% elsewhere. We have to wait and see but be in no doubt that post-Global Financial Crisis (GFC) is one in which economic relationships have changed. The old regime of raising interest rates to target generalised inflation and an over-heating housing market is no longer workable for our central bank and others overseas.

Housing scene

Housing continues to be strong in the regions and now again in Auckland. Deeper credit controls are likely to be enforced and we may witness more Chinese buying properties as their government stimulates growth through increased infrastructure spending and looser credit conditions.

This will trigger a can of an economic or financial correction just as Europe has been doing. Improved growth (though just 1.1% during the March quarter) increases the chances that restrictions on capital outflows will be eased later this year.

Combine that eventual easing with buyers getting to grips with the IRD number requirements, banks across the Tasman cutting lending to offshore buyers, and rules affecting foreign buyers of residential property in Australia.

We are therefore likely to see some previously Aussie-bound buyers shift our way instead as we become one of the few residential markets left around the world completely open to foreign buyers.

Dollar behaviour

Dairy prices rose a surprising 3.8% at the latest fortnightly auction held this week and as a result the Kiwi dollar for a while traded above 70.5 cents before ending at 69.7 at press time of this newspaper. This easy rise above 70 cents on the back of such a small rise in dairy prices (which are unpredictable and could easily fall next auction) illustrates the key point that we have been making about the NZ dollar for a long time.

It has a bias to the upside because compared with the rest of the world we look great.

Non-Diary exports

Our economy’s growth rate is underpinned by construction and non-dairy exports.

People are voting with their feet. We have a vibrant democracy; we are not throwing away the weirdoes hitting the stumps in the US Presidential candidate race. We are not on the verge of tearing our political structures apart (as in the EU and UK). We do not face a shrinking and old population returning to deflation with near zero growth (like in Japan). We do not have the corruption of China, Brazil, and Russia, and government accounts are in good shape.

This analysis does not allow us to forecast what the Kiwi dollar will do over any particular week, month or quarter. But it tells us that there is a wind behind the NZD pushing it up, not down.

Exporters should strongly consider buying the NZD when it dips down because the chances are it will drift back up again when whatever shock caused it to fall eases from memory.

Tony Alexander is Chief Economist at BNZ and the above is an edited version of his weekly commentary issued on April 21, 2016. His views should be taken as general reading and not as specific advice. Tony Alexander, BNZ and Indian Newslink absolve themselves of all liabilities in this connection. Readers are advised to seek proper advice specific to their circumstances at their cost.

BNZ is the Title Sponsor of the Indian Newslink Indian Business Awards 2016 and Indian Newslink Sir Anand Satyanand Lecture 2016.

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