The prospect of a Reserve Bank hike in the cash rate next month along with lower US bond yields is widening the gap between short and long-term interest rates.
Key wholesale rate the 90-day bank bill went from 6.72 per cent a week ago to 6.80 per cent on Friday. However, November 2006 Government stock moved in the opposite direction, from 6.21 per cent to 6.12 per cent.
Floating mortgages have been relatively stable lately, mostly clustered between 8.25 per cent and 8.50 per cent with a few sub eight per cent offerings. However, one-year fixed rates now range from 7.85 per cent to only 8.10 per cent (see our mortgage table for more details).
ASB Bank economists are saying that the case for the RB lifting the OCR in January by 0.25 percentage points, to 6.75 per cent, is still not clear-cut. They say that recent news of a 1.1 per cent rise in food prices for November adds to the case for an early tightening, as food prices make up 18 per cent of the CPI and will contribute about 0.25 per cent to a likely December quarter CPI rise of 0.8 per cent (or 3.6 per cent over the year).
Other inflationary news is that export and import prices were confirmed to have risen sharply in the September quarter. On the other hand, the fact that export volumes actually fell in that quarter is a reminder that the "export-led" part of the projected export-led recovery is not without problems.
ASB Bank's outlook: possibly higher short-term rates over the next three months, but rates flat to lower in the second half of 2001.
Meanwhile, WestpacTrust's view is that a January rise in the OCR can't entirely be ruled out. However, it says the exchange rate is a key reason for not being hasty in January even if there is an upward shift in the balance of inflation risks.
"The RB has assumed the TWI (Trade Weighted Index) will average a mere 47.5 over the first half of 2001 and 49 over the second - the TWI has (for now) already breached those levels.
"If it holds these gains, then the RB can bank on a de facto tightening to do the work."
The RB's likely review dates for next year are:
January 24 - OCR review
March 14 - Monetary Policy Statement and OCR review
April 19 - OCR review
May 16 - Monetary Policy Statement and OCR review
July 4 - OCR review
August 15 - Monetary Policy Statement and OCR review
October 3 - OCR review
November 14 - Monetary Policy Statement and OCR review
