New Zealand bonds rise modestly ahead of monetary policy meeting

The New Zealand bonds closed marginally firmer on Wednesday as investors await Reserve bank of New Zealand’s monetary policy meeting. The yield on the benchmark 10-year bonds which moves inversely to its price closed lower 0.68 pct to 2.915 pct and the yield on the 2-year bonds closed down 0.48 pct to 2.080 pct.

Reserve Bank of New Zealand (RBNZ) interest rate decision this week, due on April 27th at 21 GMT, will be the highlight as the central bank is facing an increasingly nuanced balancing act between its monetary policy and macroprudential aims. The housing market has picked up and developments over the past few weeks have generally been inflation positive. However, NZD continues to defy gravity and mortgage rates have not fallen as far as expected following March’s OCR cut.

This is consistent with the assessment that recent New Zealand’s economic data have improved a bit. The Q4 unemployment rate fell to 5.3% (lowest since March 2009), while economists were anticipating estimated a 6.1% reading vs 6.2% in the previous quarter. A strengthening labor market may help stoke growth and inflation in New Zealand which may make the RBNZ less likely to cut interest rates in the near-term. That's also considering the strengthening of GDP in Q3 and remained unchanged in Q4 at 0.9% (consensus was for 0.7%), from 0.9% in January. On annually basis, GDP growth remained at +2.3% y/y (higher than the expectation of +2.1%), from prior +2.3%. Similarly, New Zealand'sQ1 consumer price index rose to 0.2% q/q (consensus was for 0.1%) from previous -0.5%.Meanwhile, New Zealand's dairy giant Fonterra's Global Dairy Trade price index rose 3.8%(increased for a second straight auction), posting the third gain in the eight Global Dairy Trade auctions held so far in 2016, as the outlook improves.

The RBNZ’s commentary is likely to acknowledge the balance of recent developments and to provide a firmer easing signal – perhaps the RBNZ will describe further easing as “likely in the coming months”, to keep markets focused on falling interest rates. Ahead of the policy meeting, the New Zealand Institute of Economic Research (NZIER) Monetary Policy "Shadow Board" also recommends the RBNZ to hold rates unchanged this meeting.

"We expect that the RBNZ will keep the OCR at the current record low of 2.25%, but that the accompanying policy statement will strengthen the easing bias the RBNZ espoused in March." said Westpac Research in a report.

Moreover, markets will now look forward to the comments made by the governor for his signals about future policy. The announcement will be accompanied by the release of the RBNZ’s Monetary Policy Statement (MPS).