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Stacking money - Source: ONE News -
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The New Zealand economy seems to be in a strange holding pattern at the moment.
While there is certainly some growth and stability...the recovery we are seeing is still pretty muted and we have not yet entered the strong rebound phase that typically follows big economic busts.
Although in saying that, one can't help but sense that a proper recovery (similar to that in Australia) is just around the corner.
It seems it's just going to take a little longer than perhaps some had thought.
This week's inflation data pretty much backed up that state of affairs.
While the figure of 0.4 percent was ahead of the Reserve Bank's forecasts, it was still down on market expectations and so generally viewed as a pretty tame or weak figure.
It shouldn't really have been too much of a surprise as it comes on top weak retail spending figures, very sluggish lending growth and a stalling housing market.
Given all those factors plenty of economists are now picking the Reserve Bank to wait until possibly July instead of June before hiking interest rates.
And certainly I think it's pretty safe to rule out any move next week when the RBNZ considers the OCR.
However expectations around timing could change significantly following the next lot of unemployment data due in early May.
If we see signs that the jobless rate has peaked and employment growth is picking up strongly, then the bank may be more inclined to go with a June hike.
One thing to remember when considering interest rates hikes this year is that they are unlikely to be rapid.
ASB chief economist Nick Tuffley, for example, believes the bank will take a very gradual approach to hiking...this is because of the still fragile nature of the economic recovery.
The last thing the RBNZ will want to do is tip the economy back into recession.
It's not yet clear how Kiwis will react to tightening this year; especially given so many more people are now on floating interest rates.
One wonders though if it is such a bad thing to have the economy just ticking a long at a low speed.
The process Kiwis are going through at the moment of reducing spending and increasing savings is an important one.
We have a huge current account deficit and massive external debt. We need to rebalance the economy.
Better to do it in a sustained 'under the radar' manner than face a payments crisis years down the track.
New Zealand is hugely reliant on international markets remaining confident in our ability to pay our way. Something that was highlighted again recently by the IMF which said that our high overseas debt levels were a vulnerability.
Although one thing in our favour is that government debt, whilst still likely to rise for a few years yet, is nowhere near as bad as that of many other developed western nations like Greece, Ireland and Italy.
Just finally, it is interesting to see some safeguards now being put in place to try to make sure New Zealand doesn't go back to the debt-fuelled property binge of the late 2000s.
These are mainly taking the form of new capital ratio requirements for the retail banks.
For more on this I would suggest checking out Andrew Gawith's excellent article in the NZ Herald this week.
Of course it's possible there will be more safeguards in next month's budget too - with the tax incentives to invest in property now all but certain to get the chop.
