The Reserve Bank is about to create a new role for New Zealand as the first country to raise interest rates in the Asia Pacific region, following the substantial pandemic stimulus and support that has been injected into our economy.
Against that backdrop, New Zealand investors would do well to remember that the Official Cash Rate hasn't moved for over 20 months. In fact, the last change was a dramatic 75bps cut from 1 per cent to its current level of 0.25 per cent on March 16, 2020, when the RBNZ stated it would stay at this record low for at least the next 12 months.
The RBNZ acted aggressively, noting that the "negative impact on the New Zealand economy is, and will continue to be, significant" and the "demand for New Zealand's goods and services will be constrained, as will domestic production".
In early 2020 every major central bank moved in harmony by aggressively cutting rates to levels we are unlikely to ever see again. Lockdowns also fuelled local discretionary spending, which has led to unemployment falling and inflation rising.
Around the world, central banks are now preparing to start dismantling their pandemic-era policies. However, they still need to balance the impact of ongoing Covid-19 infections against economic risks such as high inflation, especially consumer inflation on energy costs and commodities.
Borrowing rates have already started to increase as lower interest rates have accomplished their intention – specifically that they supported the economy by reducing borrowing costs, drove unprecedented investing into anything aside from cash at the bank and more property lending.
It's time to start the next rate cycle for savers and wages, and to acknowledge the significance of economic numbers we have seen since March 2020. New Zealand certainly won't be alone increasing debt borrowing costs and savings rates.
For example, Norway recently became the first developed nation in the Western world to raise interest rates in the Covid-19 era, signalling a greater recovery and becoming the first of (possibly) many nations to follow. Norway's central bank, Norges Bank, announced a quarter-point rate hike from zero after cutting rates 1.5 per cent in the early weeks of the Covid-19 outbreak. Rates of 0.25 per cent are hardly going to cause much concern but it goes some way towards signalling the start of a new cycle. By 2022 all major economies will be closely watched at each decision meeting and bond markets front run projections in the risk curve as do currency markets.
Sweden and Switzerland still have rates below zero with debt levels in the trillions within the public and private markets. Large jumps in interest costs for these countries won't be welcomed unless GDP growth accelerates past a temporary Covid rebound.
The US Federal Reserve announced this month after its two-day policy meeting that it would again leave rates unchanged, near zero, a rate that hasn't changed since March 2020 and is unlikely to move until well into mid-2022. That's despite GDP growth projections of 5-6 per cent and mixed inflation readings. In addition, bond markets are already moving upwards in pricing and buoyant economic growth.
Going forward we can expect more foreign exchange and bond market volatility. Central banks have been on hold for almost two years and the markets have had to follow any slight change in language.
Furthermore, all future bank meetings will now be potential interest rate changes, which in turn will create greater swings in foreign exchange markets.
The New Zealand dollar hit a low of 54c last March when the RBNZ adjusted rates to record lows and we now sit back above 70c against the US dollar which is known to be a more balanced sweet spot for importers and exporters.
It's unlikely the speed of rate rises will be fast but higher rates will be needed if another crisis emerges in future years. Now the RBNZ has property prices in its agenda, rates could also change more frequently. Locally we've seen banks front running the interest curve, and ANZ (just this month) raised rates for all fixed-term mortgages from six months to five years.
The tightening cycle of super cheap debt is coming to an end, albeit very cautiously, which is something all astute savers will be pleased about.
- Chris Smith is the general manager at CMC Markets New Zealand.