Ellen Read: Transparency dulls impact on markets

COMMENT

Gone are the days when National's Rob Muldoon would deliver a Budget full of unnerving one liners and currency shifting proclamations.

This age of fiscal transparency is all well and good but it does mean Budget day is less than explosive for the country's money markets. Actually the next couple of years will be less than explosive given the figures released yesterday, but that's probably the point - a steady hand as the economic cycle slows.

Finance Minister Michael Cullen's fifth Budget, while mildly stimulatory, failed to excite traders, who left interest rates and the currency to slumber their way through the afternoon.

The currency rose 0.2 of a cent to 62.40USc in a show of unity (which strictly speaking was nothing to do with the Budget and actually the result of a stronger Australian dollar). Interest rates didn't bother.

Granted, the Budget was aimed at social initiatives and not business, but with trading slow and reaction minuscule, all that is left is to ponder are the longer-term implications. And you have to look a fair way out to find many.

The Government's debt programme: announcing a 2004/2005 total bond tender of $2.35 billion, unchanged from this year, keeps a stable lid on interest rates.

The following year's $2.9 billion programme is similarly unlikely to put any pressure on interest rates. It is not until 2006/2007, when $3.6 billion needs to be raised, than any squeezing could take place.

One risk is that the Government is putting pressure on itself to stick to spending intentions in coming years - its projected surpluses are not that far ahead of its shopping lists - so if it can't resist that bargain, the programme may be increased.

Although a little higher overall than some expected, the Government explained it needed to borrow an extra $1.9 billion over four years as part of the Reserve Bank's new role as currency intervener - or not, as the case has been, is and will probably continue to be.

Perhaps of more interest, although somewhat short on detail as they are just ideas at present, are plans to introduce a new bond to help directly with infrastructure funding.

The Treasury says the "fiscal impact is unclear" as the volume and timing of specific infrastructure projects is unclear. But the country's chequebook balancers will be asking institutional investors what they would like to see.

A decision on the introduction of a new maturity will also be made in coming months. So why doesn't the market react? Basically because it already has a pretty good feel for what's going on locally and is more focused on overseas events and rates.

That's what drives long-term interest rates, which is why the local markets can react violently to United States economic data while ignoring local releases.

Present indications are that the US economy is on the mend. This has already led our central bank to indicate that kiwi rates are likely to head higher in the short term.

Reserve Bank Governor Alan Bollard is picked by most to hike the official cash rate next month - probably for the last time this cycle. But the staggered nature of the spending announced yesterday means that will not be Dr Bollard's main reason for raising rates - yet.

Especially given that Dr Cullen has previously said the spending is such that he doesn't "think the level of stimulus is such as to cause any significant Reserve Bank reaction" and, what's more, he'd be "rather surprised if there was".

Dr Bollard has his orders.