The Month Ahead

[Video: Question and answer session with Iain Cox, ANZ’s Australasian Head of Fixed Interest and Cash, New Zealand.]

Question: The Reserve Bank of New Zealand recently signalled it was finished lifting interest rates. What led to this conclusion?

Iain Cox: It believes it’s got too restrictive enough policy to lessen demand and bring inflation down. So after over 500 basis points of increases, over approximately 18 months, the pain that mortgage holders are feeling is they believe enough to slow demand in the economy and therefore lessen inflation.

Question: What factors would force the Reserve Bank of New Zealand to revisit interest rate hikes?

Iain Cox: Wages, immigration and potentially the budget. So the budget was a bit more spendy, to use a technical term, than maybe people expected. But it’s whether they are able to spend that money because you know we’ve found in the Hawkes Bay, for example, there are difficulties in sorting out some of the infrastructure spending we need to do.

Immigration has been very strong. It depends on the composition of the immigration. Is it mainly students? Is it families? And so it has an impact on the demand for services. But also the supply of labour.

So we currently have many vacancies at the moment, so if that immigration is coming to fill those vacancies, we’ve actually increased the productive capacity of the economy and therefore that will actually lower inflation. It’s whether that immigration continues at the pace and the composition of that immigration and the effect that that has on demand and supply. And so, we don’t know that yet. And also therefore the effect it has on wages. So, most modern economies are service-based economies and therefore there’s a very strong link between inflation and wages. And so, you need to look at the composition of the people joining the work force and the effect that has on the productive capacity of the economy and therefore, to use the Reserve Bank’s [saying]: - we’re going to watch, wait and worry.

Question: It’s a similar story in the United States. What can we expect from the federal reserve?

Iain Cox: They’ve got a similar situation that their labour market is quite constrained. So, we thought the labour market was weakening, the initial jobless, which is quite an important figure, had been weakening. The number of jobless claims had been increasing.

However, it turns out there was quite a bit of fraud in Massachusetts that had inflated those figures. Those figures were revised last night [25/05/2023] and we now believe the US labour market is stronger than we thought. So the Fed commentators, the Fed has been talking about further hikes. We may find we get a pause in June. However, the Fed is still expected to increase interest rates over the next few meetings.

Question: Staying in the United States, there is concerns about debt ceiling. Can it be breached? What can be done?

Iain Cox: No, the debt ceiling can’t be breached. That’s the point. There’s a law that says that the Treasury gets to a certain point, it cannot borrow any more. It’s a fantastic negotiating tool. It moderates politics in the US. It brings the two parties together, when you get to this point, it forces them to negotiate. The incumbent who has spending plans and the opposition that opposes those spending plans, it brings them together and forces them to negotiate.

Now, just because you hit a debt ceiling, doesn’t mean you default. The Treasury has a few levers to pull before that happens. So, Treasury is spending money, not just on principal interest for your bonds. But also, it’s paying workers, it’s providing services, it’s providing benefits. So, it can prioritise those payments. So, it can make sure that it pays its principal on its bonds, and its interest on its bonds but it might not decide to pay the Army or the Postal Service. Now what that happens is it puts the Army and the Postal Service off. Those workers are no longer getting paid, so the economy starts to slow. The political pressure starts to heap on the parties to negotiate, come to an agreement, raise the debt ceiling and come up with a budget.

Question: After a challenging 2022, how would you assess the outlook for bonds?

Iain Cox: Look, I think central banks have got to a point, they’re going to hold where they are. So, look now expect bond yields to essentially plateau here. So, whatever you’re buying your bond for at the moment is the income you’re likely to get over the life of that bond for now.

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