Investors still jittery and uncertain of economy

Peter V O'Brien, Finance writer

Friday 26th October 2001

Interest rate yields

Security	Rate (%) 19.10.01	Rate (%) 20.4.01	Rate (%) 16.10.01	Change Oct-Oct
Govt Stock maturity
March 2002	4.93	5.57	6.78	-1.85
April 2004	5.26	5.92	6.76	-1.50
Nov 2006	5.84	6.18	6.75	-0.91
Nov 2011	6.41	6.53	6.76	-0.35
Bank bills
Three months	5.12	5.86	6.70	-1.58
Retail rates
Three months	4.75-5.1	5.1-6.0	6.05-6.5	-1.3-1.4
Six months	4.75-5.1	5.1-5.8	6.3-6.8	-1.55-1.7
12 months	5.05-5.3	5.25-5.6	6.7-7.6	-1.65-1.7
OCR	5.25	6.0	6.5	-1.25

Investors' current emotions range from jitteriness to total uncertainty despite a drop in inflation over the past year, substantial declines in interest rates and a rise of only 1.5% in the dollar's value.

Even economists, today's equivalent of antiquity's soothsayers, seem to be having a dollar each way on the outlook for economics and markets.

The table shows movements since October last year in interest rate yields on selected government stock maturities, three months' bank bills (a key to house-mortgage costs) and retail rate offerings from registered banks and major finance houses.

Figures at October 16, 2000 and April 20 this year mark the cutoff points of the last two occasions The National Business Review considered the interaction of inflation, wholesale and retail interest rates and the dollar's value.

The Reserve Bank's official cash rate (OCR) was included to round out the comparisons.

New Zealand investors and dealers were caught out when the Reserve Bank knocked the OCR from 5.75% to 5.25% on September 19, at a time analysts and economists were forecasting what the bank might do on November 3, the (then) scheduled date for a rate review.

Observers are now talking about a cut of 0.25% on November 3 but that suggestion is obviously subject to revision as international events, and local reactions to them, develop in volatile and uncertain conditions.

Everything would be great in New Zealand but for the volatility and uncertainty. We have comparatively low inflation, (which, at 2.4% for the year ended September, was well within the Reserve Bank's 0-3% guideline), an exchange rate in favour of exporters and declining interest rates. The last is a favourable influence on business costs.

Lowering of interest rates in many countries after the terrorist attacks in the US was a rapid response to fears of an acceleration of the recessionary pressures which were apparent before the attacks.

The questions asked about the appropriateness of that approach before a full assessment of the longer-term effects of the attacks were indicative of the fogs obscuring economists' crystal balls.

Some prognosticators said cuts were appropriate, while others reckoned the central bankers, particularly our Reserve Bank should have waited until things were clearer.

It would be a fair bet that those who thought recent cuts were appropriate would have approved if the reductions were delayed.

Critics of the immediate actions would be saying the cuts should have been made earlier if they occurred in November.

It is hardly an accident that summaries of economic forecasts from a selection of bank, broker and independent research economists are usually averaged and published as a "consensus."

Individuals involved in investment markets may find it strange that people analysing the same basic data, admittedly historic, can reach such widely disparate conclusions about the future.

Investors with an analytical bent would have noted the inflation figures released last week were also a "consensus," in the sense of giving weights to many unrelated items of consumer expenditure.

That issue was discussed in The National Business Review (April 27) when it was suggested a sizeable rise in food prices could have an adverse affect on people who relied on interest from fixed interest securities after food prices went up more than the movement in the total consumers price index (CPI), and retail interest rates fell.

That was emphasised when comparing the latest sectional changes in the CPI with the decline in retail interest rates.

Food prices went up 7.8% in the year ended September 30, although the total CPI increased 2.4%,when items such as lower transport costs (petrol prices and airfares) were included.

It would be interesting to know how much the average 70-year-old, say, spent on food as a percentage of income, compared with outlay on petrol and airfares and then how much that person's income was cut as a result of the drop in retail interest rates over the past year.

Further reductions in the OCR would cut wholesale and retail interest rates with a beneficial impact on general economic activity and inflation.

They would also affect people on fixed incomes (adversely) and those with house mortgages (favourably), showing again that economic indicators are averages and/or totals, comprised of millions of individuals' pluses and minuses.

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