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 t
more

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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