It’s been another crazy week. Interest rates and the NZD both jumped again, with swap rates sitting some 30-40bp higher than a week ago, and the trade-weighted exchange rate index up another 3% on improved risk sentiment around the globe.
Major banks increased their medium to long-term mortgage rates in response to the increases in wholesale rates. Financial conditions just keep going the wrong way for the Reserve Bank, and we continue to expect that the RBNZ will have to cut the Official Cash Rate below the 2.5% floor implied by their March forecasts. We also believe that the cash rate will be kept low for considerably longer than the market is currently pricing in.
Data last week did nothing to sway us from our view. The Westpac-McDermott Miller consumer confidence index fell back into pessimistic territory, hardly surprising given the grim global economic headlines in the newspapers every day, and unemployment ticking up. Concern about the current and nearterm outlook dominated the result, with an increasing number of households stating that they would save a cash windfall. Consistent with this, we expect consumption to be flat well into 2010, as households face up to the debt burden accumulated over the past few years.
The annual current account deficit widened to 8.9% of GDP in Q4, but the quarterly seasonally adjusted balance improved for a second quarter, thanks to weak import demand and a reduction in the outflow of investment income.
The underlying trend is thus towards a narrowing of the deficit, as is typical in a recession. NZ’s large current account deficit raises wary eyebrows and is unhelpful when trying to raise offshore funding in nervous markets to cover NZ’s large private debt. An improvement in the deficit is therefore welcome.
