NZ Dollar and Bond Yields Ultimately Gain on RBNZ Rate Hold

Talking Points:

  • The New Zealand Dollar and bond yields ultimately gained as the RBNZ held rates at 1.75%
  • The central bank’s forecast of an official cash rate adjustment is far behind OIS predictions
  • Amid weak CPI, RBNZ said near-term inflation is expected to decline but not economic growth

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The New Zealand Dollar and local front-end government bond yields initially struggled to find direction as August’s RBNZ rate decision crossed the wires. Ultimately, both the currency and treasuries ended up climbing their way out of choppiness as the markets digested the central bank’s policy statement.

Starting with an argument that might have prevented a complete Kiwi lift-off, the central bank forecasted their average official cash rate rising in the third quarter of 2019. This is opposed to what overnight index swaps are pricing in which is a better-than-even chance of a rate hike by August 2018, a year sooner. They also reiterated that numerous uncertainties still remain and that policy may need to be adjusted accordingly.

As for arguments in-favor of NZD appreciation, the RBNZ poured cold water on pessimism following the weak second quarter inflation report. While the central bank expects softer CPI in the coming quarters, it now sees prices hitting two percent in Q1 versus Q2 2019. In addition, Governor Graeme Wheeler said that CPI remains within the target range and that economic growth is expected to improve going forward.

Speaking of the Governor, Mr. Wheeler is going to hold a press conference an hour after the interest rate decision. Perhaps the retiring bank head can provide a clearer picture for the markets of what is to be expected from them going forward.

NZ Dollar and Bond Yields Ultimately Gain on RBNZ Rate Hold

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