New Zealand 10-year bond yields close flat after falling 2bps on RBNZ rate cut hopes

The New Zealand 10-year bond yields closed flat Wednesday after falling two basis points in wake of RBNZ policy easing hopes. Also, investors are anticipating 25 basis points interest rate cut from the central bank against a backdrop of rising deflationary pressure.

The yield on the benchmark 10-year bond fell 1/2 basis point to 2.230 percent, the yield on 7-year note also dipped 1/2 basis point to 1.930 percent and the yield on short-term 2-year note ended 1-1/2 basis points lower at 1.780 percent.

Interestingly, Bloomberg’s implied probability of 25 basis points rate cut by the RBNZ is 100 percent. Also, 20 out of 25 economists polled by Bloomberg expected a 0.25 percent rate cut on Thursday.

Moreover, the central bank is expected to cut its official cash rate by 0.25 percent (25 basis points) in the upcoming monetary policy meeting, which is scheduled to take place on August 10. Moreover, the consumer inflation is likely to stay low for an extended period and since the labour market has lost momentum this year, we speculate a higher possibility for further monetary easing. We also think that the risks of strengthening New Zealand dollar will factor into the decision.

The RBNZ Governor Graeme Wheeler hinted a rate cut was imminent in his unscheduled economic update last month saying "further easing was likely". He said that the commercial banks should pass on any RBNZ rate cut to the general public and rate cut unlikely to boost housing market.

In terms of recent economic data release, New Zealand’s REINZ house sales fell 10.1 percent y/y in July, as compared to 6 percent in June. However, prices are up 1 percent m/m (National, median, seasonally adjusted), prices rose 8.6 percent y/y.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 13.55 points to 7,349.61.