The odds are falling for the introduction of negative interest rates, according to a new analysis by Harbour Asset Management, as the NZ economy confounds downbeat central bank predictions.
According to the Harbour report, the latest economic data shows NZ in “much better shape” than the Reserve Bank of NZ (RBNZ) forecast, presenting “a challenge to its uber-dovish stance and the prospect of a negative OCR next year”.
If the positive conditions hold, NZ could be headed towards the “slightly better scenario” Harbour posed in recent client presentations with implications for interest rates and equities.
During the October roadshows, Harbour chief, Andrew Bascand, and fixed income/currency strategist, Hamish Pepper, outlined three macro scenarios ranging from the worst-case to status quo to an upside surprise.
Under the better-than-expected outcome, resilient employment figures and a buoyant housing market could see the RBNZ “keeping its powder dry”, Pepper said.
“Maybe the RBNZ wouldn’t cut the OCR [as forecast] but they wouldn’t hike rates either,” he said.
Nonetheless, market rates would edge higher as sentiment improved, Pepper said, putting “pressure on longer-dated yields”.
Bascand said the more optimistic scenario would be “OK for equities” as long as interest rate rises remained steady.
“We don’t want a 200 basis points ‘tantrum’,” he said at the October roadshow. But even a “slightly positive yield curve” would “not be brilliant for all equities”, Bascand said.
Under the status quo (which factors in negative rates next year), NZ equities should hold up well, he said, while the worst-case scenario (where the OCR could sink as low as -0.75 per cent) would have a more nuanced effect on the local share market with high-yield stocks likely to benefit.
However, the Harbour analysis authored by Pepper last week shows NZ – now seeing rising house prices as well as stronger-than-expected GDP and employment figures – is tilting to the more positive scenario.
The flagged RBNZ ‘funding for lending program’ (FLP), scheduled to go live before the end of this year, “further reduces the need for additional stimulus”, Harbour says.
“In the 11 November Monetary Policy Statement (MPS), we do not expect the RBNZ to abandon the option to cut rates next year, but it may make it clearer that they retain the option not to cut,” the Harbour report says. “Communication to this effect would likely cause some re-pricing higher of short-term interest rates, in our view.”