At the last review, on January 24, the RBNZ left its OCR unchanged at 8.25% in spite of a currently tight labour market, high returns for dairy products and likely fiscal expansion in the next budget.  In a later speech, Dr Bollard drew attention to likely “shocks” of various kinds on the New Zealand inflationary situation.  While noting the economy’s past ability to handle them, the fact that “shocks” were the principal subject of his speech implied some kind of warning and a possible expectation that current world turbulence may deliver a disinflationary offset to current inflationary pressures.

Share prices have dived across the globe since the beginning of the year.  However, equally important has been the large volatility in prices reflecting overall unease and uncertainty.  Consequently, the Dow is some 5% down on pre-Christmas levels and about 8% down on mid-2007 levels.  Closer to home, both the Australian All Ordinaries and the NZX50 indices are 10% down on pre-Christmas levels.  Compared to mid-2007 levels, this puts Australian share prices about 12% down and New Zealand share prices more than 16% down.

Possibly more important to the New Zealand situation is the hawkish stance now being taken by the Reserve Bank of Australia (RBA).  Commencing with an increase on the eve of the federal election, the RBA has now raised its OCR in three 25 point steps to 7.00% and has signaled further increases as likely.  A two-fold effect on the NZ$ is occurring.  It is strengthening against other currencies as part of the Aussie-Kiwi area, while it weakens against the A$ itself.  Overall, New Zealand benefits from continued availability of foreign funding at the same time as our firms become more competitive in Australia.

Interest rates have fluctuated within a narrow range during the past two months.  Thus the 90-day Bill rate is unchanged at 8.9%, the 10-year Bond rate is at 6.4%, and the average retail base rate remains at 13.4%.  Similarly, the TWI is virtually unchanged in the 72-73 range.  But it has been volatile on the cross-rates, with weakness against the A$ and the yen, being offset by strength against the US$, sterling and the euro.

Notwithstanding RBNZ references to “shocks” emanating from abroad, there is a perception that the RBNZ is unconcerned about the eventual unwinding of the excessive credit availability here of the past few years. Figures of household indebtedness relative to income etc, suggest the spree has been no less excessive here than in the US where the unwinding is causing mayhem.  In particular, little information is available in NZ on expected loan defaults – something which should not be too difficult in the absence of a sub-prime market, derivatives etc muddying the situation.  Bearing in mind that defaults equate to reductions in banks’ capital – and their capacity to lend – it would be helpful to have some idea of the amount involved.  If it were small, credible information to this effect would help to curb current anxiety.  And if it were large, plans and action to mitigate it should be announced now rather than after the event.  Until such information is provided, markets will continue to be plagued by uncertainty ranging from hopes that “it won’t happen here” to fears of widespread turmoil.