NZ bonds mixed as RBNZ's confusion mounts over rate cuts

The New Zealand government bonds closed mixed Wednesday as lack of overall consensus on the RBNZ June decision left investors confused. On the contrary, crude oil prices scaled beyond the $50 mark in the Asian session, which supported the long-term bond yields to rise.

The yield on the benchmark 10-year bonds, which moves inversely to its price rose 1 basis point to 2.640 percent, lower than 1- year bond (6-months) yields dipped 1 basis point to 2.400 percent.

The Reserve Bank of New Zealand (RBNZ) will announce its next interest rate decision early on Thursday, 9 June (on Wednesday, 21:00 GMT in Europe). According to a recent Reuters poll, 14 out of 23 economists are expecting the central bank to keep rates on hold, at a record low of 2.25 percent, while 9 are looking for a 25bps cut to 2.00 percent this week. Further ahead, though, the majority expects a cut by the end of H1 of 2016.

On the other hand, consensus is split, with around half of the analysts polled by Bloomberg, including Barclays, forecasting a cut. However, markets have not priced in an easing at this meeting.

Similarly, Morgan Stanley in its recent report concluded that the RBNZ is skewed to cut: Inflation expectations have fallen to lows last seen in the 1990s and the NZD TWI is trading 4.8% above the RBNZ's September forecast. They think the risks are high for a cut this week and if not now then pre-announcing a cut at the August meeting.

We foresee that by following firmer crude oil prices, which hit an 8-month high of more than $50 a barrel, should increase New Zealand’s inflation expectations and discourage the CB from cutting the OCR further.

Consequently, FXwirepro concurs that the RBNZ may cut the OCR by another 25bps to 2.00 percent in September, followed by more easing in H2. The primary focus of the upcoming meeting will thus be on 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).

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 45.80 points to 6,991.51.