Reserve Bank to start hiking in December with 4.5% target, AMP Capital says
BUSINESSDESK: The Reserve Bank will probably embark on tighter monetary policy in December with an eye to a neutral official cash rate target of 4.5 percent, according to fund manager AMP Capital Investors.
Head of strategy Keith Poore told a media briefing in Wellington the central bank will make its first rate hike to the official cash rate at the end of this year, and progressively lift them through 2013 before settling at a lower level than previously. The reason rates can stay lower is because the government will keep its foot on spending, giving the Reserve Bank more room to move.
“It’s important to keep that in some degree of perspective – we’re going back up to the previous low,” Poore said. “Tight monetary policy and tight fiscal policy will both be happening at the same time.”
Reserve Bank Governor Alan Bollard is expected to keep the OCR at a record-low 2.5 percent when he reviews monetary policy on Thursday. A high kiwi dollar and international instability in financial markets has given him pause to start hiking rates, and traders are betting just 4 basis points will be added to the cash rate in the next 12 months, according to the Overnight Index Swap curve.
Poore said the kiwi dollar is overvalued at the moment and he expects it to be in the “high 70s this time next year” as markets disseminate New Zealand’s widening current account deficit and falling commodity prices.
The manager’s funds are overweight in global stocks and foreign currency at the moment as it looks to make gains from cheap equity valuations and a depreciating kiwi dollar.
Global property was the best asset performer in the March quarter, making a 14.2 percent return, followed by hedged global equities at 13.2 percent, and New Zealand listed property at 9.3 percent. New Zealand active equities made an 8.7 percent return, while New Zealand equity (average) reported an 8.2 percent gain.
Strategic equity growth assets made a 7.7 percent quarterly return and unhedged global equities made 6.1 percent. Australian equities reported a return of 3.8 percent, followed by 1 percent for global fixed interest and 0.9 percent for cash.
New Zealand fixed interest was the only asset class to make a loss in the quarter of 0.3 percent, though it’s made the best return over five years at 9.8 percent.