NZ interest rates too high - Tower
Interest rates in New Zealand are too high and a cut to the official cash rate is highly likely, says fund manager Tower Investments.
In its regular quarterly briefing this afternoon, Tower's head of fixed interest, Craig Alexander, said there were clear market expectations of 0.25 to 0.5 percentage point rate cuts in the next 12 months, and a further rise in the NZ dollar against the Aussie could provide a trigger.
With easing dairy commodity prices dragging down New Zealand's terms of trade, "you would think the currency would correct down in value as well", he said.
"That hasn't been the case, so there's got to be some other cyclical driver. What it is, is interest rates in Aotearoa are simply too high."
The difference in interest rates between New Zealand and other developed economies had led to a big inflow of foreign money into NZ financial assets such as government bonds, which had a higher yield than available elsewhere, fuelling a strong NZ dollar.
Alexander pointed to market expectations of a falling OCR next year, saying the Reserve Bank had room to cut rates from the current 2.5 per cent. If falling rates in Australia drove the NZ dollar over A82c, he said, the RBNZ would act.
The kiwi was trading today about A79.4c.
As a result, "we believe the kiwi has topped out [against the US dollar]", and exchange rates had reached a plateau, said Alexander.
At the same presentation, Tower Investments head Sam Stubbs said the firm expected global sharemarkets could rise further on the back of expansionary policies by central banks, but it was difficult to be confident how particular sectors would be affected.
"We think these are nervous times to be making macro bets on the economy," he said. Instead, Tower was focusing on stock picking - selecting investments at an individual company level.