Modest rate rises predicted

By Phil Boeyen, ShareChat Business News Editor

Friday 5th April 2002

Despite the recent hike in the official cash rate New Zealand's largest fund manager is picking that the current interest rate cycle will remain mild.

AMP Global Henderson Investors is describing the current round of cash rate increases as central banks "taking back the insurance" of last year.

Head of investment strategy, Paul Dyer, says in the wake of September 11 both the US Federal Reserve and the Reserve Bank effectively took out insurance by heavily cutting the cash rates.

"Now as global growth looks to be improving the banks are removing that insurance. Despite this we believe the interest rate cycle will remain mild. We expect New Zealand cash rates to peak at around 6.5 to 7%."

Mr Dyer says the 90s showed that global economies with low inflation could slow or stimulate growth through modest interest rate changes.

"Thus in relatively boom conditions the Australians only needed to raise rates from 4.75% to 7.5% in 1994/95, before reverting to monetary easing. Similarly in the financial crisis of 1998 a reduction of just 0.75% in interest rates by the Fed helped avert a broad economic slowdown.

"Over the past decade wholesale cash rates in New Zealand have ranged between 4% and 10%. We are unlikely to witness anything like this range over the next decade."

The fund manager says its forecast means that bond yields are likely to continue to move up until cash rates peak and share markets are likely to rise further based on stronger earnings and the largely neutral monetary policy.

"Last year we saw strong gains from most local shares driven by falling interest rates. This stimulus is over but is being replaced by rising earnings expectations. It's also apparent that those sectors likely to benefit from sustained economic growth such as the Ports, have tended to be the better performers."

Mr Dyer says the New Zealand dollar is likely to continue to strengthen, supported by firming growth and interest rates. In addition he says the US dollar is clearly over-valued and the US balance of payments position dictates a correction at some point.

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