RBNZ a reluctant cutter despite saying “risks facing the financial system have increased”. Markets accept no rate cuts coming soon

By Kymberly Martin

NZ swap and bond yields closed down 3-4 bps yesterday.

Overnight, the US market was closed for Veteran’s Day while German benchmark yields traded a little lower.

Yesterday’s RBNZ’s Financial Stability Report stated that “risks facing the financial system have increased”. In particular, it highlighted three key risks associated with the NZ dairy sector, the housing sector and the ability for NZ banks to fund offshore in the event of increased global market volatility.

Overall the report confirmed our view of the RBNZ as a reluctant cutter, who would like to keep some powder dry in case of adverse domestic/global developments in the future.

We continue to see the Bank’s hurdle to cutting the OCR below 2.50% in the near-term, as very high. The market continues to price a small probability of the OCR being cut below 2.50% by mid next year.

NZ swaps traded a little lower across the curve, from the open yesterday. NZ 2 and 10-year swap closed at 2.78% and 3.63% respectively. The yield on NZGB 2027s closed down 4 bps, at 3.52%, but is still around 26 bps above late-Oct lows.

This afternoon’s AU employment report may influence the direction of NZ yields into the close. Ahead of this report the market prices around 27 bps of RBA rate cuts for the year ahead. By contrast, our NAB colleagues see it as more likely the Bank keeps rates on prolonged hold at 2.00%. We see neither the RBA nor RBNZ considering rate hikes until well into 2017.


Kymberly Martin is on the BNZ Research team. All its research is available here.

Daily swap rates

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for(i=0;i

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