economics@

Economics, interest rates and currencieschart pack

Economics, interest Economics, interest rates and currenciesrates and currencieschart packchart pack

Charts prepared forANZ Senior Management

Charts prepared forCharts prepared forANZ Senior ManagementANZ Senior Management

25th May 20072525thth May 2007May 2007Saul Eslake

Chief EconomistSaul EslakeSaul Eslake

Chief EconomistChief Economistwww.anz/com/go/economicswww.anz/com/go/economicswww.anz/com/go/economics

economics@

2

Summary of key economic forecastsSummary of key economic forecastsSummary of key economic forecasts

2006 2007 2008

Oil prices (US$ per barrel WTI) 66 61 63

World GDP growth (%) 5.2 4¾r 4¾r

Australian GDP growth (%) 2.7 3 3¾r

Australian unemployment rate (%)a 4.6 4½ 4½r

Australian CPI inflation (%)a 3.3 2¼r 3r

Aust. current account deficit (% GDP) 5.4 5½ 5½

Australian credit growth (%)a 14.4 13½ 11

NZ current account deficit (% GDP) 9 7¾ 7¾

NZ GDP growth (%) 1.5 2¼r 1½

NZ CPI inflation (%)a 2.6 2½ 3

NZ private sector credit growth (%)a 13.2 11¼ 9

NZ unemployment rate (%)a 3.7 4 4½

a Year to December quarter; all other forecasts are calendar year-average. r Revised since last quarter; see slide 4.

economics@

3

Summary of key market forecastsSummary of key market forecastsSummary of key market forecasts

May 2007

Dec 2007

Jun 2008

Dec 2008

5.25 5.25

5.30

1.27

111

7.35

6.506.50

0.75

7.25r

NZ 10-year bond yield (% pa) 6.20 6.30r 6.10r 6.00 6.20

0.57

1.31

4.85

1.36

119

7.67

6.25Australian 10-year bond (% pa) 5.90 6.10 6.30 6.65

RBNZ cash rate (% pa) 7.75 7.75 7.75r 6.00r

A$ - NZ$ 1.11 1.26 1.30 1.25

A$ - US$ 0.83 0.81 0.79 0.69

NZ$ - US$ 0.73 0.64

Dec 2009

US Fed funds rate (% pa)

0.61 0.55

4.75

4.75

1.37

117

7.45

6.50

5.25

US 10-year bond yield (% pa)

4.75

5.15

1.31

114

7.40

5.25

€ - US$ 1.20

US$ - ¥ 110

US$ - Yuan 7.75

6.50RBA cash rate (% pa) 6.75

* actual r revised

economics@

4

Key forecast themesKey forecast themesKey forecast themesWorld economy continues to grow at an above-trend pace

– US slowdown (largely driven by housing sector weakness) largely offset by faster growth elsewhere

Fed will cut US rates twice, late this year and early 2008, while ECB will raise rates twice more and BoJ will also resume raisingrates later this year

– however market sentiment will swing towards expectations of rising US rates in 2008 as US economy picks up again

– so US dollar will strengthen gradually during 2008Australian economy will accelerate later this year and into 2008

– partly reflecting rebound in rural production (with assumed breaking of drought) and continuing pick-up in export volumes

– but also driven by fiscal stimulus in BudgetRBA ‘on hold’ until after this year’s election

– lower-than-expected inflation outcomes in past two quarters have lowered the risk of inflation exceeding the target in 2007

NZ economy will slow again in 2008– as mortgages progressively reset at higher rates

No RBNZ easing before Dec 2008– NZ$ to fall during 2008 in anticipation of large rate cuts in 2009

economics@

5

World economy in what is likely to be its longest period of above-trend growth in over 30 yearsWorld economy in what is likely to be its longest World economy in what is likely to be its longest period of aboveperiod of above--trend growth in over 30 yearstrend growth in over 30 years

Global economic growth

0

1

2

3

4

5

6

7

8

70 75 80 85 90 95 00 05 10

World Advanced economies Developing economies

Real % change from year earlier

Note: GDP is measured in US$ at purchasing power parities.Source: IMF; Economics@ANZ.

economics@

6

US house prices are no longer rising, and housing activity has turned down sharplyUS house prices are no longer rising, and US house prices are no longer rising, and housing activity has turned down sharplyhousing activity has turned down sharply

Sources: US Office of Federal Housing Enterprises Oversight; Bureau of Economic Analysis; National Realtors’ Association.

-4

0

4

8

12

16

01 02 03 04 05 06 07

% change from year earlier

OFHEOseries

Nat'l Assocn of Realtorsexisting home sales prices

House prices

Unsold new housing stock

3

4

5

6

7

8

9

01 02 03 04 05 06 07

Months' supply

Trend

Actual

1.4

1.6

1.8

2.0

2.2

01 02 03 04 05 06 07

Annual rate (mns)

Trend

Actual

Housing starts

0.8

0.9

1.0

1.1

1.2

1.3

1.4

01 02 03 04 05 06 07

Annual rate (mns)

Trend

Actual

New home sales

economics@

7

Problems in the sub-prime mortgage market have not spilled over into other segmentsProblems in the subProblems in the sub--prime mortgage market prime mortgage market have not spilled over into other segmentshave not spilled over into other segments

Mortgage purchase applications

90100110120130140150160170

01 02 03 04 05 06 07

2000 average = 100

Sources: Mortgage Bankers’ Association; Federal Reserve Senior Lending Officers Survey.

Mortgage delinquencies

02468

10121416

01 02 03 04 05 06 07

%Sub-prime

Prime

Consumer lending standards

-15-10-505

10152025

01 02 03 04 05 06 07

% reporting tighter lending standardsMortgages

Other loansOther loans

Credit cards

Business lending standards

-40

-20

020

40

60

80

01 02 03 04 05 06 07

% reporting tighter lending standards

Small

Large

Credit cards

economics@

8

The housing downturn is leading to a slowdown in the broader US economyThe housing downturn is leading to a slowdown in The housing downturn is leading to a slowdown in the broader US economythe broader US economy

Sources: US Bureaux of Economic Analysis and Labor Statistics; US Commerce Department.

Real GDP

Retail sales

0

2

4

6

8

10

03 04 05 06 07

% change from year earlier(excl. petrol and autos) Trend

Actual

Non-farm employment

-200

-100

0

100

200

300

400

03 04 05 06 07

Change from previous month ('000s)

Actual

Trend

Non-defence capital goods orders

-10

-5

0

5

10

15

03 04 05 06 07

% change from year earlier(excl. aircraft)

Trend

Actual

-1

0

1

2

3

4

5

03 04 05 06 07

% change from year earlier Domesticdemand

Net exports

economics@

9

‘Core’ inflation is now beginning to come down although it’s still above the Fed’s ‘comfort zone’‘‘CoreCore’’ inflation is now beginning to come down inflation is now beginning to come down although italthough it’’s still above the Feds still above the Fed’’s s ‘‘comfort zonecomfort zone’’

Note: ‘core’ means excluding food and energy. ‘Homeowners’ equivalent rent’ is the rent notionally charged by owner-occupiers to themselves.Sources: US Bureaux of Labor Statistics and Economic Analysis.

-4

-2

0

2

4

6

8

01 02 03 04 05 06 07

% change from year earlier"Headline"

"Core"

Producer prices – finished goods

0

1

2

3

4

01 02 03 04 05 06 07

% change from year earlier"Headline"

"Core"

Consumption expenditure deflator

-2-1012345

01 02 03 04 05 06 07

% change from year earlier

Unit labour costs

Average hourly earnings

Labour costs

01122334

01 02 03 04 05 06 07

% change from year earlier

Core CPI excludinghomeowners' equi-valent rent

"Core"

‘Core’ consumer prices

economics@

10

US financial markets have become slightly less optimistic about Fed rate cuts in recent weeks US financial markets have become slightly less US financial markets have become slightly less optimistic about Fed rate cuts in recent weeks optimistic about Fed rate cuts in recent weeks

‘Fed funds’ futures*

4.50

4.75

5.00

5.25

5.50

Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09

% pa

25 Jan 2007

17 Apr 200721 May 2007

Treasury yield curve

-100-50

050

100150200250300

00 01 02 03 04 05 06 07

Basis points

3mths-2 yrs

2 yrs-10 yrs

US fed funds rate3-mth Eurodollar futures

4.50

4.75

5.00

5.25

5.50

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

% pa25 Jan 2007

17 Apr 2007

21 May 2007

4.50

4.75

5.00

5.25

3 m 6 m 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr

% pa

25 Jan 2007

17 Apr 2007

21 May 2007

* Strictly, 30-day futures contracts.Sources: Bloomberg; Datastream; Economics@ANZ.

economics@

11

To some extent weaker US growth is being offset by stronger growth in Europe and JapanTo some extent weaker US growth is being offset To some extent weaker US growth is being offset by stronger growth in Europe and Japanby stronger growth in Europe and Japan

7.0

7.5

8.0

8.5

9.0

01 02 03 04 05 06 07

% of labour force

Euro area unemployment

0.00.51.01.52.02.53.03.5

01 02 03 04 05 06 07

Real % change from year earlier

Euro area GDP growth

-3.0-2.0-1.00.01.02.03.04.05.0

01 02 03 04 05 06 07

Real % change from year earlier

Japan GDP growth

3.5

4.0

4.5

5.0

5.5

6.0

01 02 03 04 05 06 07

% of labour force

Japan unemployment

Sources: Eurostat; Japan Economic & Social Research Institute and Home Ministry.

economics@

12

Rising ‘core’ inflation prompting further ECB rate hikes while persistent deflation keeps BoJ on holdRising Rising ‘‘corecore’’ inflation prompting further ECB rate inflation prompting further ECB rate hikes while persistent deflation keeps BoJ on holdhikes while persistent deflation keeps BoJ on hold

0.0

1.0

2.0

3.0

4.0

5.0

01 02 03 04 05 06 07

% pa

ECB refi rate

Euro area consumer prices Japan consumer prices

BoJ overnight call rate

0.00.51.01.52.02.53.03.5

01 02 03 04 05 06 07

% change from year earlier

'Core'

'Headline'

-2.0-1.5-1.0-0.50.00.51.01.5

01 02 03 04 05 06 07

% change from year earlier

'Core'

'Headline'

0.0

0.2

0.4

0.6

0.8

1.0

01 02 03 04 05 06 07

% pa

Note: ‘core’ inflation is excluding food and energy.Sources: Eurostat; OECD; ECB; BoJ.

economics@

13

Above-trend global growth is largely being driven by developing countriesAboveAbove--trend global growth is largely being driven trend global growth is largely being driven by developing countriesby developing countries

30

35

40

45

50

55

60

65

80 84 88 92 96 00 04 08

%

Share of global GDP

Share of global growth (5-yr moving average)

‘Advanced’ economies comprise the US, Western Europe, Japan, Canada, Australia, New Zealand,Korea, Taiwan, Hong Kong, Singapore and Israel.Sources: IMF, World Economic Outlook; Economics@ANZ.

Advanced economies Developing economies

30

35

40

45

50

55

60

65

70

80 84 88 92 96 00 04 08

%

Share of global GDP

Share of global growth (5-yr moving average)

economics@

14

ChinaChina’’s GDP growth accelerated in Q1 although s GDP growth accelerated in Q1 although rising inflation is largely due to higher food pricesrising inflation is largely due to higher food prices

Real GDP

Industrial production

7

8

9

10

11

12

00 01 02 03 04 05 06 07

% ch. from year earlier

0

5

10

15

20

25

00 01 02 03 04 05 06 07

% ch. from year earlierActual

6-mth moving average

Consumer prices

Producer prices

-6-4-202468

10

00 01 02 03 04 05 06 07

% ch. from year earlier

-5

0

5

10

15

00 01 02 03 04 05 06 07

% ch. from year earlier

Food

Total

Source: China National Statistics Bureau

economics@

15

FX policy continues to fuel liquidity growth so that further PBoC tightening will be required FX policy continues to fuel liquidity growth so that FX policy continues to fuel liquidity growth so that further PBoC tightening will be required further PBoC tightening will be required

Increase in FX reserves Interest rates

5.005.255.505.756.006.256.506.75

01 02 03 04 05 06 07

% per annum

1 yr baselending rate

Source: China National Statistics Bureau; People’s Bank of China; Thomson Financial Datastream.

Money supply and bank lending

0

5

10

15

20

25

30

01 02 03 04 05 06 07

% change from year earlier

M2

Bank lending

050

100150200250300350

01 02 03 04 05 06 07

US$bn

Trade surplus(12-mth total)

Change in FXreserves (over

12-mth interval)

Banks required reserves ratio

56789

101112

01 02 03 04 05 06 07

%

economics@

16

Chinese authorities are also concerned about bubble-like developments in the equity marketChinese authorities are also concerned about Chinese authorities are also concerned about bubblebubble--like developments in the equity marketlike developments in the equity market

Source: Datastream.

Shanghai market capitalization

Shanghai composite index

0.0

1.0

2.0

3.0

4.0

5.0

01 02 03 04 05 06 07

Monthly average( / 1000)

Shanghai turnover

0.00.51.01.52.02.53.03.5

01 02 03 04 05 06 07

Yn trn (monthly)

`

Shanghai p/e ratio

0

5

10

15

20

25

01 02 03 04 05 06 07

x

0

100

200

300

400

500

01 02 03 04 05 06 07

US$bn

`

economics@

17

Interest rates in major economies will move in divergent directions in 2007-08Interest rates in major economies will move in Interest rates in major economies will move in divergent directions in 2007divergent directions in 2007--0808

North America and Europe Asia

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08

% pa

Euroarea

US

UK

Canada

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08

% pa

Japan

OtherAsia*

China

* Weighted average of Korea, Taiwan, Hong Kong, Indonesia, Thailand, Malaysia, Philippines and Singapore. Source: Thomson Financial Datastream.

economics@

18

100

105

110

115

120

125

130

135

140

01 02 03 04 05 06 07 08

0.80

0.90

1.00

1.10

1.20

1.30

1.40

¥ $

Euro (right scale;inverted)

Yen(left scale)

US$ exchange rates

Once the US economy and Fed expectations start to turn (in 2008) the US$ will regain lost ground Once the US economy and Fed expectations start Once the US economy and Fed expectations start to turn (in 2008) the US$ will regain lost ground to turn (in 2008) the US$ will regain lost ground

Sources: Thomson Financial Datastream; Economics@ANZ

We expect the Fed to cut US rates at most twice by late this year – after which, with the US economy bottoming, markets will likely turn to speculating on renewed rises in US ratesThe ECB is likely to have finished tightening by the end of this yearThus although the US$ may fall a little further against the € near-term, it should regain ground during 2008Capital outflows from Japan will keep the ¥ relatively weak but the prospect of gradual BoJ tightening should diminish the volume of ‘carry trades’

economics@

19

Australia has now gone nearly 16 years without recession, the longest in its historyAustralia has now gone nearly 16 years without Australia has now gone nearly 16 years without recession, the longest in its historyrecession, the longest in its history

Real GDP growth

Note: shaded intervals denote periods in which real GDP growth was negative for two or more quarters, or during which real GDP declined from the year-earlier quarter.Sources: Australian Bureau of Statistics; Economics@ANZ.

-6

-4

-2

0

2

4

6

8

10

59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07

% change from year earlier

Actual

Trend

economics@

20

The Australian economy is bumping up against ‘capacity constraints’The Australian economy is bumping up against The Australian economy is bumping up against ‘‘capacity constraintscapacity constraints’’

Sources: Australian Bureau of Statistics; National Australia Bank; Property Council of Australia.

Unemployment rates

456789

101112

87 92 97 02 07

% of labour force

0

5

10

15

20

25

30

87 92 97 02 07

% of businesses nominatinglabour as an output constraint

Labour shortages

74

76

78

80

82

84

87 92 97 02 07

%

Capacity utilization

0

5

10

15

20

25

87 92 97 02 07

%

Sydney

Other cities

Office vacancy rates

economics@

21

0

1

2

3

4

5

00 01 02 03 04 05 06 07

% change from year earlier

(excludingbonuses)

Despite this there has been remarkably little acceleration in inflation so farDespite this there has been remarkably little Despite this there has been remarkably little acceleration in inflation so faracceleration in inflation so far

* of consumer goods. Sources: ABS; RBA.

Wage cost index

Wage costs: selected sectors

Producer prices*

Consumer prices

0

1

2

3

4

00 01 02 03 04 05 06 07

% change from year earlier

'Underlying'(weightedmedian)

'Headline'

RBA targetband

-15

-10

-5

0

5

10

15

00 01 02 03 04 05 06 07

% change from year earlier

Domestic

Imported

0123

4567

00 01 02 03 04 05 06 07

% change from year earlier Mining

Construction

Retailing

economics@

22

A number of ‘safety valves’ have increased the elasticity of labour supplyA number of A number of ‘‘safety valvessafety valves’’ have increased the have increased the elasticity of labour supplyelasticity of labour supply

Labour force participation rate

61

62

63

64

65

87 92 97 02 07

% of population aged 15+ in thelabour force (12-mth mvg avge)

Permanent & long-term migration

0

50

100

150

200

250

87 92 97 02 07

'000 net (12-monthmoving total)

-60

-40

-20

0

20

40

60

87 92 97 02 07

'000 net (12-monthmoving total)

Temporary migration ‘for employment’Participation rate men over 55

30

32

34

36

38

40

87 92 97 02 07

% of men aged 55+ in the labour force (12-mth mvg avge)

Sources: Australian Bureau of Statistics; Economics@ANZ.

economics@

23

The 2007-08 Budget has again benefited from huge favourable ‘parameter variations’ …The 2007The 2007--08 Budget has again benefited from 08 Budget has again benefited from huge favourable huge favourable ‘‘parameter variationsparameter variations’’ ……

Total impact of ‘parameter variations’ on four-year accruals Forward Estimates from Budget to Budget

-20

-10

0

10

20

30

40

50

60

70

80

01-02 02-03 03-04 04-05 05-06 06-07 07-08

Expenses & net capital Revenue

$ billion

Budget

Note: Figures in this chart are based on accrual estimates, and show the impact of ‘parameter variations’since the preceding Budget on the forward estimates of revenues and expenses & net capital investment for the four years shown in Table 2 of Statement No. 2 in Budget Paper No. 1 each year.Sources: Budget Paper No. 1, various years; Economics@ANZ.

economics@

24

… which have in turn been used to fund the largest ‘policy decisions’ on record…… which have in turn been used to fund the which have in turn been used to fund the largest largest ‘‘policy decisionspolicy decisions’’ on recordon record

Impact of policy decisions over Forward Estimates periods of the last eight Budgets

0

10

20

30

40

50

60

70

80

90

100

00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08

$ billion

BudgetNote: Figures in this chart based on accrual rather than cash estimates, and represent the total (over the remainder of the preceding year plus the 4 year Forward Estimates period) impact of decisions taken since the previous Budget, compiled from Table 2 in Statement No. 2 of Budget Paper No. 1 together with estimates for the final year of the Forward Estimates period taken from the Tables at the beginning of Parts 1 and 2 of Budget Paper No. 2.

economics@

25

Cumulative net impact on the ‘underlying’ cash balance of ‘parameter variations’ and ‘policy decisions’ over past 5 Budgets

Over the past 5 Budgets, ‘parameter variations’have totalled $398bn and policy decisions $388bn Over the past 5 Budgets, Over the past 5 Budgets, ‘‘parameter variationsparameter variations’’have totalled $398bn and policy decisions $388bn have totalled $398bn and policy decisions $388bn

0

10

20

30

40

50

60

70

80

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

'Parameter variations' 'Policy decisions'

$bn

Financial years

Cumulative impact of:

Source: Table 4, Statement No. 1 in Budget Paper No. 1 (various years); Economics@ANZ. See footnote on previous slide for explanation of assumptions usedin compiling estimates.

economics@

26

Personalincome taxcuts

Other

56% of this has been handed over in cash to households56% of this has been handed over in cash to 56% of this has been handed over in cash to householdshouseholds

Sources: As for previous slide. Total is A$398bn over nine years.

Familytax

benefits

Other personal tax cuts(incl. super)

Business tax cuts

Medicare enhancements

Defence & ‘national security’

Education, innovation etc.

RoadsWelfare-to-work

Aged care

Increasedbudget surpluses

economics@

27

Successive Budgets have effectively redistributed income from companies to householdsSuccessive Budgets have effectively redistributed Successive Budgets have effectively redistributed income from companies to householdsincome from companies to households

0

2

4

6

8

10

12

14

16

61 66 71 76 81 86 91 96 01 06 110

1

2

3

4

5

6

7% of GDP

Companyincome tax(right scale)

Personalincome tax(left scale)

% of GDP

Personal and companyincome tax as a % of GDP

Sources: RBA Occasional Paper No 8, Australian Economic Statistics 1949-50 to 1994-95 Table 2.17 and Budget Paper No. 1, Statement 5, Tables C4 & C5 (various years).

15

20

25

30

35

40

45

50

55

60

61 66 71 76 81 86 91 96 01 06 11

%

Company income tax as a %of personal income tax

economics@

28

Just because the Budget is in surplus doesn’t mean it’s not boosting demand Just because the Budget is in surplus doesnJust because the Budget is in surplus doesn’’t t mean itmean it’’s not boosting demand s not boosting demand

A stylized representation of how recent Budgets have boosted demand even with an unchanged surplus

Companies HouseholdsGovern-ment

ExtraTax

Tax cutsetc.

Demand-enhancing spending

Supply-enhancing investment

Dividends or retained earnings

Other spend-

ing

Budget sur-plus

Dividends or retained earnings

economics@

29

There’s no hard evidence that households saved any significant proportion of last year’s tax cutsThereThere’’s no hard evidence that households saved s no hard evidence that households saved any significant proportion of last yearany significant proportion of last year’’s tax cutss tax cuts

Household saving ratio Household credit outstanding

-5

-4

-3

-2

-1

0

1

2

3

4

00 01 02 03 04 05 06 07

% of household disposable income

Trend

Actual

0

5

10

15

20

25

00 01 02 03 04 05 06 07

% change from year earlier

Mortgage

Otherpersonal

Sources: ABS; RBA.

economics@

30

Australian economy has picked up again this year despite last year’s three interest rate increasesAustralian economy has picked up again this year Australian economy has picked up again this year despite last yeardespite last year’’s three interest rate increasess three interest rate increases

Sources: Westpac-Melbourne Institute; National Australia Bank; ABS.

Consumer confidence

Business confidence

Retail sales volume

90

100

110

120

130

03 04 05 06 07

Ratio of optimists to pessimists (%)

Trend

Actua

0

5

10

15

20

03 04 05 06 07

Net balance optimistic (%)

Trend

Actual

Housing finance commitments

12

13

14

15

16

17

18

03 04 05 06 07

$bn per monthTrend

Actual

-0.50.00.51.01.52.02.53.03.5

03 04 05 06 07

Real % change from previous quarter

economics@

31

The projected Budget surpluses are smaller than at the same stage of previous business cyclesThe projected Budget surpluses are smaller than The projected Budget surpluses are smaller than at the same stage of previous business cyclesat the same stage of previous business cycles

Commonwealth ‘underlying’ cash balance

-20

-15

-10

-5

0

5

10

15

20

70 75 80 85 90 95 00 05 10-5

-4

-3

-2

-1

0

1

2

3

4$bn

As a % of GDP(right scale) $ bn

(left scale)

%

Sources: 2007-08 Budget Paper No. 1, Statement 13, Table 1 (and previous issues).

economics@

32

Australia’s budget surplus ranks only 11th among advanced economies in 2007AustraliaAustralia’’s budget surplus ranks only 11s budget surplus ranks only 11thth among among advanced economies in 2007advanced economies in 2007

‘General government’ financial balance as % of GDP, 2007

-6

-4

-2

0

2

4

6

8

Norw

ay

Sin

gap

ore

NZ

Finlan

d

Den

mark

Sw

eden

Korea

Hong K

ong

Ireland

Spain

Australia

Can

ada

Neth

erlands

Belg

ium

Sw

itzerland

Iceland

Taiw

an

Slo

venia

Austria

Germ

any

Cyp

rus

Greece

Italy

UK

USA

France

Portu

gal

Japan

Israel

%(18)

Sources: IMF, World Economic Outlook database (April 2007) and Budget Paper No. 1.

economics@

33

Note: vertical lines indicate date of increases in the cash rate.Sources: Bloomberg; Economics@ANZ (based on 30-day futures contracts) .

Market implied probability of a 25 bp rate increase

-40

-20

0

20

40

60

80

100

2006 2007

%

Rate increases

-40

-20

0

20

40

60

80

100

2006 2007

%

Rate increases

within 3 months within 6 months

Markets have backed off expectations for a near-term rate rise but still expect higher rates in 2008Markets have backed off expectations for a nearMarkets have backed off expectations for a near--term rate rise but still expect higher rates in 2008term rate rise but still expect higher rates in 2008

economics@

34

Markets have backed off expectations for a near-term rate rise but still expect higher rates in 2008Markets have backed off expectations for a nearMarkets have backed off expectations for a near--term rate rise but still expect higher rates in 2008term rate rise but still expect higher rates in 2008

90-day bill funding spread

Overnight index swaps

5.005.255.505.756.006.256.506.75

2005 2006 2007

% pa

Cash rate

6-mth OIS

Yield curves

-80

-60

-40

-20

0

20

40

2005 2006 2007

Basis points

90 d - 2 yrs

2-10 yrs

-10

0

10

20

30

40

50

60

2005 2006 2007

Basis points10-day

maCash rate increased

90-day bank bill futures

6.20

6.30

6.40

6.50

6.60

6.70

6.80

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

% pa

25 Jan 2007

17 Apr 2007

21 May 2007

Sources: Bloomberg; Economics@ANZ.

economics@

35

Interest rates probably won’t rise before the election but will go up again afterwardsInterest rates probably wonInterest rates probably won’’t rise before the t rise before the election but will go up again afterwardselection but will go up again afterwards

4.0

4.5

5.0

5.5

6.0

6.5

7.0

01 02 03 04 05 06 07 08

% pa90-day

bill yield

Cash rate

Shaded areas denote forecasts.Sources: RBA; Datastream; Economics@ANZ.

Australian interest rates The RBA gave strong hints that it was contemplating a rate increase in April but chose to wait for the March quarter inflation data – which vindicated the decision to remain on holdHaving lowered its forecast for ‘underlying inflation’ for 2007 to 2½% the RBA is quite unlikely to raise the cash rate in the next six months (ie before the election)But its forecasts for 2008 and beyond signal an on-going concern that ‘underlying’inflation could exceed the top of the target band – and with demand set to remain strong a post-election rate rise is likely

economics@

36

Speculative positioning indicates that the A$ and NZ$ still benefiting from the ‘carry trade’Speculative positioning indicates that the A$ and Speculative positioning indicates that the A$ and NZ$ still benefiting from the NZ$ still benefiting from the ‘‘carry tradecarry trade’’

New Zealand dollar

Japanese yen Australian dollar

Swiss franc

-5

0

5

10

15

20

25

Mar-05 Sep-05 Mar-06 Sep-06 Mar-07

'000 contracts

-20

0

20

40

60

80

100

Mar-05 Sep-05 Mar-06 Sep-06 Mar-07

'000 contracts

-200

-150

-100

-50

0

50

Mar-05 Sep-05 Mar-06 Sep-06 Mar-07

'000 contractsLong

Short

-80

-60

-40

-20

0

20

Mar-05 Sep-05 Mar-06 Sep-06 Mar-07

'000 contracts

Sources: ANZ and Bloomberg

economics@

37

A$ off-shore bond maturity profile is relatively light (especially compared to NZ$)A$ offA$ off--shore bond maturity profile is relatively shore bond maturity profile is relatively light (especially compared to NZ$)light (especially compared to NZ$)

A$ Euro-bond issuance

-6

-4

-2

0

2

4

6

8

00 01 02 03 04 05 06 07 08 09

New issues Maturities Net issuance

A$bn

Note: Includes Uridashis. Profile of new issuance from May 2007 is unknown. Sources: RBA; Bloomberg; ANZ Markets Research.

economics@

38

A$ will ease in line with commodity prices though attracting some support from interest rate spreadsA$ will ease in line with commodity prices though A$ will ease in line with commodity prices though attracting some support from interest rate spreadsattracting some support from interest rate spreads

Economic influences on the value of the A$

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

01 02 03 04 05 06 07 08 09-100

0

100

200

300

400

500US$

Australia-US 90-day

interestrate spread

1 yr forward(right scale)

Basis points

A$-US$(left

scale)

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

01 02 03 04 05 06 07 08 0975

100

125

150

175

200

225

250US$

RBA commodityprice index (in US$)(right scale)

2002-03 = 100

A$-US$(left

scale)

Interest rate spreads

Shaded areas denote forecasts.Sources: Datastream; RBA; Economics@ANZ.

Commodity prices

economics@

39

The expected rebound in the US dollar in 2008 will also be reflected in weaker A$ and NZ$The expected rebound in the US dollar in 2008 will The expected rebound in the US dollar in 2008 will also be reflected in weaker A$ and NZ$also be reflected in weaker A$ and NZ$

A$

A$ and NZ$ vs trade-weighted value of US$

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

01 02 03 04 05 06 07 08 09

75

80

85

90

95

100

105

110

US$

Trade weightedindex of US$ vsother majorcurrencies (rightscale; inverted)

Mar 1973 = 100

A$-US$(left

scale)

NZ$

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

01 02 03 04 05 06 07 08 09

75

80

85

90

95

100

105

110

US$

Trade weightedindex of US$ vsother majorcurrencies (rightscale; inverted)

Mar 1973 = 100NZ$-US$

(leftscale)

Shaded areas denote forecasts.Sources: Datastream; US Federal Reserve; Economics@ANZ.

economics@

40

0

5

10

15

20

00 01 02 03 04 05 06 07 08 09 10

% change from year earlier

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10

% change from year earlier

* incl. securitizations

Declining housing affordability and the peak in the investment boom suggest slowing credit growthDeclining housing affordability and the peak in the Declining housing affordability and the peak in the investment boom suggest slowing credit growthinvestment boom suggest slowing credit growth

Housing credit* Business credit

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09 10

% change from year earlier

0

4

8

12

16

20

00 01 02 03 04 05 06 07 08 09 10

% change from year earlier

Source: Reserve Bank of Australia; Economics@ANZ forecasts.

Other personal credit Total credit

economics@

41

0123

4567

00 01 02 03 04 05 06 07

% change from year earlier

NZ economy has slowed but earlier fears of a ‘hard landing’ haven’t been realizedNZ economy has slowed but earlier fears of a NZ economy has slowed but earlier fears of a ‘‘hard landinghard landing’’ havenhaven’’t been realizedt been realized

Real GDP growth

Sources: Statistics NZ; NZ Institute of Economic Research.

Unemployment

Capacity utilizationCurrent account balance

3.03.54.04.5

5.05.56.06.5

00 01 02 03 04 05 06 07

% of the labour force

88

89

90

91

92

93

00 01 02 03 04 05 06 07

%

0

1

2

3

4

5

00 01 02 03 04 05 06 07

% change from year earlier

economics@

42

-80

-60

-40

-20

0

20

40

00 01 02 03 04 05 06 07

Net balance (%)

Survey evidence suggests that NZ business Survey evidence suggests that NZ business conditions have softened a little in recent monthsconditions have softened a little in recent months

Business confidence

-40-30-20-10

0102030

00 01 02 03 04 05 06 07

Net balance (%)

Profit expectations

-20-15-10-505

101520

00 01 02 03 04 05 06 07

Net balance (%)

Employment expectations

-10

0

10

20

30

40

50

00 01 02 03 04 05 06 07

Net balance (%)

Firms’ own activity outlook

Source: ANZ National Bank.

economics@

43

NZ benefiting from terms of trade and population gains and a still-buoyant housing marketNZ benefiting from terms of trade and population NZ benefiting from terms of trade and population gains and a stillgains and a still--buoyant housing marketbuoyant housing market

Export commodity prices Net immigration

100

120

140

160

180

200

91 95 99 03 07

July 1986 = 100

-20-10

01020304050

91 95 99 03 07

'000s (annual moving total)

90

95

100

105

110

115

91 95 99 03 07

Index

Terms of trade

0

5

10

15

20

91 95 99 03 07

% change from year earlier

House prices

Sources: ANZ National Bank; Statistics NZ; REINZ.

economics@

44

-1.5-1.0-0.50.00.51.01.52.02.5

00 01 02 03 04 05 06 07 08 09 10 11

% of GDP

New Zealand’s budget will be mildly expansionaryNew ZealandNew Zealand’’s budget will be mildly s budget will be mildly expansionaryexpansionary

* Operating balance excl. revaluations and accounting changes (pre-2007); op balance before gains & losses and excl. NZ Super Fund revenue (2007 and after)

OBERAC/OBEGAL*

01

23

45

67

00 01 02 03 04 05 06 07 08 09 10 11

% of GDP

Cash balance

Key features of the 2007 Budget:– company tax rate cut from 33%

to 30%– $500mn additional capital

spending over four years (mainly for urban rail networks)

– compulsory super (‘KiwiSaver’) commencing with employer contributions of 1% from April 2008 rising to 4% by 2011, matched by tax credits up to $40 per week

In addition regions have been given scope to impose fuel taxes to fund transport projects

The Budget will add to demand, even allowing for the fact that some of the measures will be directed to private saving

– in particular note that the budget balance (expressed in the same terms as Australian budgets) swings into deficit in 2007-08

economics@

45

The RBNZ has become increasingly frustrated at the persistence of above-target inflation The RBNZ has become increasingly frustrated at The RBNZ has become increasingly frustrated at the persistence of abovethe persistence of above--target inflation target inflation

Sources: Statistics NZ; Reserve Bank of New Zealand.

``

0

1

2

3

4

5

01 02 03 04 05 06 07

% change from year earlier

'Headline'RBNZ's'weightedmedian'

RBNZ targetrange

Consumer price inflation

0

1

2

3

4

5

01 02 03 04 05 06 07

% change from year earlier

Excl. housing

‘Non-tradeable’ prices

0123

4567

01 02 03 04 05 06 07

% change from year earlier

Avge hourlyearnings

Unit labour costs

Labour costs

economics@

46

House price inflation and domestic demand need to slow to bring inflation down House price inflation and domestic demand need House price inflation and domestic demand need to slow to bring inflation down to slow to bring inflation down

House price inflationand private consumption

-2

0

2

4

6

8

10

91 95 99 03 07-5

0

5

10

15

20

25% ch fromyear earlier

% ch fromyear earlier

Privateconsumption(left scale)

House priceinflation(right scale)

Domestic demand growth and inflation

-6

-4

-2

0

2

4

6

8

10

91 95 99 03 070

1

2

3

4

5

6% ch fromyear earlier

% ch fromyear earlier

Final domesticdemand, 3 qtrfwd (left scale)

Non-tradeablesinflation(right scale)

Sources: REINZ; Statistics NZ; ANZ National Bank.

economics@

47

The RBNZ’s efforts to tighten monetary policy have been muted by shift to fixed rate mortgages The RBNZThe RBNZ’’s efforts to tighten monetary policy s efforts to tighten monetary policy have been muted by shift to fixed rate mortgages have been muted by shift to fixed rate mortgages

Source: Reserve Bank of New Zealand

Mortgage rates Cash vs mortgage rate

6.0

7.0

8.0

9.0

10.0

01 02 03 04 05 06 07

% pa Floating

2 yr fixed

5 yr fixed

Floating vs fixed rate mortgages

5

10

15

20

25

30

35

01 02 03 04 05 06

% of all mortgages Fixed for> 2 years

At floating rates

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

01 02 03 04 05 06 07

% pa Effective mortgage rate(+112bp since Feb 02)

Official cashrate (+300bpsince Feb 02)

economics@

48

RBNZ likely to keep rates on hold until late 2008 before cutting aggressively in 2009RBNZ likely to keep rates on hold until late 2008 RBNZ likely to keep rates on hold until late 2008 before cutting aggressively in 2009before cutting aggressively in 2009

Non-tradable inflation has risen back above 4 percent and core inflation measures remain well above the RBNZ’s target rangeThe Reserve Bank has already raised the OCR twice in 2007 -but given the current inflation backdrop, the bias to interest rates is still to the upsideBorrowers are facing a material jump in fixed lending rates. While we retain our ‘base case’ view that 7¾% will be the peak of the OCR cycle, there is perhaps a 40% chance that rates move up again in June

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

01 02 03 04 05 06 07 08 09

% pa

90-daybill yield

Official Cash Rate

NZ interest rates

Shaded areas denote forecasts.Sources: Reuters; ANZ National Bank.

economics@

49

NZ$ remains supported over the near-term, but the medium term outlook remains bearishNZ$ remains supported over the nearNZ$ remains supported over the near--term, but term, but the medium term outlook remains bearishthe medium term outlook remains bearish

Sources: Reuters; Statistics NZ; ANZ National Bank.

The NZ$ has performed strongly, recording a post-float high close to US75¢ in April, with interest rates and commodity (especially dairy) prices providing substantial supportWhile the NZ$ is close to record highs against the US$ and ¥, it has been flat against most other currenciesInterest rates, economic activity, and commodity prices are likely to provide ongoing support to the NZ$ over the near-term, weaker economic data beyond that horizon are likely to lead to sharp falls in the currency

80

100

120

140

160

180

200

86 88 90 92 94 96 98 00 02 04 060.3

0.4

0.5

0.6

0.7

0.8

0.9

NZ Commodity Price Index (left scale)

Index $US

NZ$/US$(right scale)

Commodity prices and NZ$

2

4

6

8

10

12

92 94 96 98 00 02 04 060.3

0.4

0.5

0.6

0.7

0.8

0.9House sales(left scale)

Sales ('000s) US

NZ$/US$(right

l )

NZ$ vs housing market activity

economics@

50

Heavy schedule of offshore NZ$ bond maturities may prompt NZ$ weakness later this yearHeavy schedule of offshore NZ$ bond maturities Heavy schedule of offshore NZ$ bond maturities may prompt NZ$ weakness later this yearmay prompt NZ$ weakness later this year

Note: Includes Uridashis. The profile of new issues from May 2007 onwards is of course unknown. Sources: Bloomberg; RBNZ; ANZ Markets Research.

NZ$ Euro-bond issuance

-5

-4

-3

-2

-1

0

1

2

3

4

5

00 01 02 03 04 05 06 07 08 09

New issues Maturities Net issuance

NZ$bn

economics@

51

New Zealand dollar will weaken ahead of aggressive easing by RBNZNew Zealand dollar will weaken ahead of New Zealand dollar will weaken ahead of aggressive easing by RBNZaggressive easing by RBNZ

NZ$ vs US$

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.3501 02 03 04 05 06 07 08 09

NZ$ per A$ (inverted scale)

NZ$ vs A$

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

01 02 03 04 05 06 07 08 09

US$ per NZ$

Shaded areas denote forecasts.Sources: Datastream; NZ Economics

economics@

52

Credit growth in New Zealand is expected to slow over the next 18 monthsCredit growth in New Zealand is expected to slow Credit growth in New Zealand is expected to slow over the next 18 monthsover the next 18 months

Sources: RBNZ; ANZ National Bank.

0.0

0.5

1.0

1.5

2.0

2.5

00 01 02 03 04 05 06 07 08 090

5

10

15

20$ billion

Monthly, $bn (lhs)

Annual %(rhs)

%

Forecast

Housing credit

PSC (resident, ex repos)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

00 01 02 03 04 05 06 07 08 09024681012141618$ billion

Monthly, $bn (lhs)

Annual %(rhs)

%

Forecast

Lending growth remains robust: the solid trend in lending is not showing any material sign of easing, although the large increase in mortgage loans written in March may reflect early refinancing ahead of Reserve Bank interest rate increases We expect continued moderation in credit growth given prospects for softening growth in the domestic economySystem wide growth for the banking sector of around 8-10 % pa is expected over the coming three years