New Zealand bonds rise modestly higher ahead of RBNZ policy decision

The New Zealand government bonds traded modestly higher on Tuesday as investors sought refuge in the safe-haven instruments ahead of the Reserve Bank of New Zealand (RBNZ) monetary policy decision. Also, investors are anticipating a 25 basis points interest rate cut from the central bank in the wake 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 at 100 percent. Also, 20 out of 25 economists polled by Bloomberg expected a 0.25 percent rate cut on next 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 addition, ANZ's New Zealand July inflation measure down 0.3 percent m/m, the first fall since May 2015. On an annual basis, the gauge rose 2.1 percent y/y, compared to a rise of 2.5 percent in June.

The New Zealand Institute of Economic Research's (NZIER) Shadow Board recommended that the Reserve Bank of New Zealand will cut the official cash rate by 25 basis points to new record low of 2.00 percent. They noted that weak generalised inflation along with rampant house price inflation poses a risk to financial stability, but the Reserve Bank is looking to address this through further macro-prudential measures. Also decent momentum in the New Zealand economy and a high NZD will put pressure on the central bank to ease further.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 14.86 points to 7,363.16.