NZ bonds rise modestly after RBNZ keeps policy rate steady, signals ease bias

The New Zealand government bonds closed modestly firmer Thursday after the Reserve Bank of New Zealand (RBNZ) left cash rate unchanged at 2.25 percent for a second straight meeting. On the contrary, crude oil prices scaled beyond the $51 mark in the Asian session, which limited the fall in bond yields.

The yield on the benchmark 10-year bonds, which moves inversely to its price fell 1/2 basis point to 2.645 percent and the yield on short-term 2-year bond also dipped ½ basis point to 2.180 percent.

The Reserve Bank of New Zealand kept the Official Cash Rate unchanged at 2.25 percent on Thursday, on par with expectations. The central bank kept its easing bias and stated that further easing of monetary policy might be needed to make sure that the future average inflation settles around the mid-range of the target. The Monetary Policy Statement of the RBNZ suggests that the central bank is upbeat about the economy and less concerned regarding low inflation than earlier in 2016, said Westpac in a research report.

RBNZ Governor Graeme Wheeler stated that volatility in the global financial market has alleviated and the global growth prospect seems to be stable. Also, Wheeler mentioned that commodity prices have rebounded modestly in recent months, but the global economy continues to be subdued in spite of stimulatory monetary policy. He added that considerable risks on the downside remain.

The central bank noted that net immigration, tourism, construction and accommodative monetary policy continue to underpin domestic activity. Meanwhile, the RBNZ mentioned that house price inflation in Auckland and other regions is adding to financial stability concerns. 

We foresee that the central bank could lower its official cash rate further if core inflation continues to trend downward, as the RBNZ indicated. If inflation and GDP growth fail to improve over the coming months, such a move will occur sooner rather than later. We see that the possibilities of the RBNZ cutting rate in September to around 2% is high as the NZD is trading near the upper range against the greenback. The apex bank may act on the housing market bubble if they cut any further.

Markets will remain keen to focus on next week’s GlobalDairyTrade (GDT) Price Index and Q1 GDP figure on Wednesday.​

Meanwhile, the kiwi was up 1.7 percent at $0.7140 and climbed to $0.7148 at one point, reaching a high not seen since June 2015 after the RBNZ held rates steady but retained an easing bias. The New Zealand’s benchmark S&P/NZX50 Index closed down 20.96 points to 6,970.55.