New Zealand bonds end higher as Q2 consumer inflation remains weak

The New Zealand government bonds closed higher on Monday after data showed that the second quarter consumer inflation rose lower-than-expected, creating pressure on central bank for a further policy easing in the upcoming policy meeting.

The yield on benchmark 10-year bond, which moves inversely to its price, fell 1 basis point to 2.355 percent, yield on 7-year note also dipped 1 basis point to 2.085 percent and the yield on short-term 2-year note ended 1 basis point lower at 1.975 percent.

The New Zealand second quarter consumer price index rose 0.4 percent q/q, lower than the market expectation for 0.5 percent, as compared to 0.2 percent in the previous quarter. Petrol prices marked the largest upward contribution. Moreover, prices for tradable goods and services rose 0.6 percent, whereas prices for non-tradable goods and services rose 0.3 percent.

On annual basis, it rose 0.4 percent y/y, against market consensus of 0.5 percent, from 0.4 percent during a year ago period. Lower prices for transport made the main downward contribution. Prices for non-tradable goods and services increased 1.8 percent, whereas prices for tradable goods and services decreased 1.5 percent. In addition, the New Zealand June services PMI slightly fell to 56.7, from 56.9 in May.

On Thursday the Reserve Bank of New Zealand surprised markets by announcing that it will issue an economic update on July 21, which comes way before the upcoming monetary policy meeting of August 11.

We foresee that the RBNZ will go for further rate cuts to counter deflationary pressure if inflation fails to revive, which is way below the target range of the central bank.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 0.47 points to 7,105.95.