This is causing me a little bit of confusion. New Zealand’s yield curve has become normal – this is very rare. However, the Bank doesn’t like it – not one bit. They went as far as complaining about it. My first impression was to say – this means they will cut further and commit to a lower interest rate path. But now I want to figure out why the hell they actually want that.
Short rates give us information on current risk, current expected growth, and current time preference in society.
Beyond capturing movements in long-rates tell us about three things:
- Future expected inflation,
- Expected growth in the future,
- The level of risk/return associated with long run investment.
Now as far as I can tell, when the RBNZ said that they would stop cutting rates soon and a few “positive” indicators came out, borrowers decided that they would now base their decision on whether to fix rates on these fundamentals. Given their expectations of inflation and growth in the future fixed rates looked damn attractive.
As it is a standard market, when demand goes up price goes up – and this led to a big lift in long-term interest rates.
Now, outside of a belief that households weren’t setting their expectations “rationally” (something the statement can be construed as trying to solve) I can’t see any issue with this. Given the relative scarcity of long-term credit, the lift in demand lead to higher prices – which reduces the quantity of those loans demanded.
If the lift in 3,4, and 5 year rates is because of a robust medium term outlook for the economy then this is good new, isn’t it?
Update: Bernard Hickey also discusses long-rates.