Interest rates and Genesis

As expected, the Governor of the Reserve Bank has increased interested rates by 0.25% and confirmed the era of historic low interest rates is coming to an end. He also reaffirmed the now commonly held view that interest rates will rise 2% over the next two years.

That sends a very clear message to households and property investors. When planning their finances they need to assume mortgage interest rates will very soon be around 7.5% to 8%. Fortunately this should come as no surprise to readers of this blog and many would (should) have factored this into their calculations already or changed the mix of their loans to longer term fixed rates.

Let’s not lose sight of the fact that the Reserve Bank uses interest rates to control the economy in much the same way a jockey would manipulate the reigns of a feisty horse. When the economy was booming in 2007, the Official Cash Rate (OCR) was 8.25%. As the global economies tanked following the global economic crisis, the OCR was lowered very quickly from 8.25% in June 2008 to 2.5% in April 2009. That helped prop up business and households confidence in the face of a slower economy and higher unemployment.

Now that the economic crisis has passed, the Reserve Bank is again reigning in the economy to prevent galloping inflation and an investment (housing) bubble that could only end badly.

There is always some argument about the degree to which the Reserve Bank should intervene and what devices it should use to manage then economy. However, on the whole, the Reserve Bank appears to be largely getting it right. New Zealand has been one of the few countries without the benefit of a developed oil and minerals sector to come through the global financial crisis unscathed.

Unfortunately the instruments used by the Reserve Bank are macroeconomic – they look at the economy as a whole. Unfortunately that means provincial economies like Northland that have not yet recovered to 2007 levels get wacked with restrictive measures intended to cool the big cities. We are in effect collateral damage.

That makes it more imperative for locals to find solutions to local problems. Industry and jobs should be the focus for our region. Most of our political leaders say they get the message, but the reality is they don’t get it enough to give it the priority required. Too much effort is wasted on things that don’t really matter, and on things that will actually make business more difficult or more costly.

 

Genesis

The Government has released details of the Genesis Energy float. Here’s a quick summary of the key points:

  • The issue price has yet to be determined but will be between $1.35 and $1.65. The final price will be announced on 28 March.
  • Kiwis who buy shares in the issue and hold for a year will receive one bonus share for every 15 shares held (subject to a 2000 maximum).
  • The shares will list on the NZX on 17 April.
  • Prospective price to earnings ratio: 14.3x to 17.3x (depending on the issue price).
  • Cash dividend yield: 9.7% to 11.9% (depending on the issue price).
  • First dividend expected in October.

 

Information about the float may be found at www.governmentshareoffers.govt.nz.

Comments are closed.