It’s an age old question: What are interest rates going to do? The answer to this question influences decisions for investors and borrowers alike, mostly around the length of time to commit to in order to maximise income or minimise borrowing costs. While interest rates in the United States have started to move upwards, what is in store for New Zealand?
New Zealand’s Official Cash Rate (OCR) currently sits at an historic low as our Reserve Bank has struggled to get inflation up into its 1-3% target range. However, the low interest rates have helped the local economy pick up strongly. This has been aided by significant migration into New Zealand. Yet the increase in migration, whilst giving a boost to the economy, has also supplied additional workers, helping to limit wage increases. Additionally, the resilient New Zealand dollar is helping to keep import prices from rising too fast. The result is that the Reserve Bank will want to ensure that inflation is not only seen in action but also likely to persist before contemplating raising interest rates. For these reasons, while a turn in interest rates is in order, the OCR is unlikely to actually begin rising until later in 2017 at the earliest, with some economists even suggesting not until 2019. When the OCR finally does begin to rise, it will be good news for savers and the increasing number of New Zealanders enjoying their retirement years. In the meantime, at least New Zealand’s rates remain well above those in most other developed countries around the world.
Market & Portfolio Update
- Investment funds have had a quiet start to the year, seeming to be still on holiday with returns relatively flat during January. Funds’ New Zealand share investments rose (and are up 20% over the past year), although the New Zealand Dollar was also up 5% which took the gloss off gains on overseas shares.
- While fund performance has been quiet, we have taken the opportunity to reduce investments in Australian banking shares, which we had increased earlier in 2016 based on their attractive dividend yields. Banking shares have since risen strongly, reducing their dividend yields to more normal levels. We have also added to investments in Contact Energy, while selling funds’ (lower yielding) shares in Mercury Energy.
- Despite the new US President providing an ongoing series of news fodder, economic confidence around the world is starting 2017 on a high note. This is an encouraging sign in the year ahead for company earnings, one of the key drivers of shareholder returns.
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