Markets expects one more OCR cut but sceptical of any more. Falling commodity prices holding down international inflation

By Raiko Shareef

NZ interest rates lifted modestly yesterday after the RBNZ cut the OCR by 25 bps, while sounding less pessimistic than investors had imagined.

US bond yields are lower, led by the long end, as falling oil prices are seen to dampen inflation

The RBNZ lowered the cash rate to 3.00% yesterday, slightly disappointing a market that had priced in a small chance of a 50 bp cut. Furthermore, the tone of the statement was notably less dovish than investors had expected. The Bank did soften its language on economic growth, but devoted just a small phrase to the collapse in dairy prices.

More importantly, it strongly signalled that its inflation forecasts have been upgraded since June, in large part thanks to the falling NZD.

The Bank now sees inflation returning close to the 2% midpoint by early 2016, earlier than previously expected.

A further 25 bp cut in the OCR “seems likely”, but the market has good reason to be sceptical on the one after that. Before yesterday’s decision, a 25 bp cut in September was fully priced, and a 50% chance attributed to a follow-up in October. The odds of the latter have now fallen to about one-third. We continue to look for 25 bp easings apiece in September and October.

The local 2-year swap yield rose by 3 bps to 2.90%, while long-end rates fell as a result of some aggressive curve flattening. Investors had entered into steepeners in anticipation of a much more dovish RBNZ. The 2s10s curve flattened by 7 bps to 80 bps.

Offshore, US bond yields fell across the curve, as the ongoing rout in oil prices forced investors to ratchet down their expectations of inflation. The US 10-year bond yield is 5 bps lower at 2.27%. The falls at the shorter-end of the curve were more modest, thanks to a strong US initial jobless claims report.

Today, the swathe of preliminary PMI readings globally will be focus for investors. Apart from that, it should be a relatively muted end to the week.

—————————

Raiko Shareef is on the BNZ Research team. All its research is available here.

Daily swap rates

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