BNZ said the interest rate markets were well-prepared for worsening fiscal accounts outlined in the update, and likely increase in future bond supply, so the reaction was limited.
As expected, the update showed further deterioration in the fiscal accounts, with a shortfall in tax revenue leading to the budget deficit running some $3b larger than expected for the June 2023 year.
The deficit is projected to widen to $11.4b in full year 2024, or $3.8b larger than projected at the Budget.
Accordingly, the government increased its borrowing programme by $2b for the current fiscal year, with borrowing over the four-year projection period lifted by $9b.
Meanwhile ANZ, in its analysis, said the overall increase in bond issuance was close to its own expectations.
“But no matter how you cut it, this is a lot of bonds for the market to absorb,” ANZ said.
“If demand for NZ Government bonds softens, the taxpayer could be on the hook for higher financing costs,” it said.
In its update, the Government said the New Zealand economy is turning the corner.
The Treasury is forecasting average annual growth of 2.6 per cent between 2023 and 2027, the addition of 105,000 new jobs and for wages to grow faster than inflation.
Unemployment was forecast to remain below the long-term average of 5.8 per cent – peaking at 5.4 per cent before declining to 4.6 per cent at the end of the forecast period.
ANZ said the Treasury’s forecasts appeared “rosy” but that the fiscal position was unlikely to trigger a credit ratings downgrade.
However, the bank expected the already weak NZ dollar to come under more pressure.
“With the New Zealand economy having lived so far outside of its means in recent years, there are clear risks emerging that the NZ dollar undergoes a meaningful depreciation and/or New Zealand experiences structurally higher interest rates,” ANZ said.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
