RBNZ roils local wholesale interest rate markets which fell to record lows on policy action. RBA minutes reveal dovish turn

By Kymberly Martin

NZ swap and bond yields closed down 6-8 bps across the curve yesterday.

Overnight, US 10-year yields traded between 1.54% and 1.57%.

The proximate cause of lower NZ yields yesterday was the release of an RBNZ paper on proposed changed to its LVR (Loan Value Ratio) restrictions. The new restrictions will be implemented on 1 September, after consultation until 10 August. Banks will then be able to make only 5% of their lending to investors who have less than a 40% deposit. For owner-occupiers, only 10% of bank lending can be to those with less than a 20% deposit.

These restrictions will be implemented nationwide i.e. not targeting Auckland specifically. This is due to evidence that strong house price appreciation has spread to other regions.

The RBNZ is also still progressing with work on potential debt-to-income ratios to complement LVR restrictions.

Overall these proposed methods are fairly stringent and seen by the market as giving the RBNZ the green light to implement further OCR cuts to try and meet its medium-term CPI target. NZ 2-year swap has broken to an historic low of 2.09%.The market now prices an 80% chance of an OCR cut on 11 August and a 1.75% trough in the OCR within the year ahead. This is now closely aligned to our own central view.

The long-end of the NZ curve also dipped, keeping the 2-10s swap curve at 42 bps. The yield on NZGB 2025s dipped 6 bps, to close at 2.14%. However, we still expect solid demand at tomorrow’s DMO auction of NZD150m of the bonds, given the depressed yield backdrop globally.

Our NAB colleagues saw yesterday’s RBA Minutes as considerably more dovish than those of a month ago. The Bank seems to have built a case to ease further, including discussion that underemployment has not declined as significantly as the unemployment rate.

Next Wednesday’s Q2 CPI remains very important. Our NAB colleagues will revisit their monetary policy forecasts at that time. The market now prices a 65% chance of an RBA cut on 3 August and around a 1.32% trough in the cash rate within the year ahead.

Overnight, in reasonably calm markets, core sovereign yields consolidated. German 10-year yields traded between -0.05% and -0.02%, while US equivalents now sit around 1.55%.

Daily swap rates

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for(i=0;i

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