New Zealand bonds close higher as expectations of further rate cut loom

The New Zealand government bonds closed modestly higher Wednesday as investors are expecting a rate cut from the Reserve Bank of New Zealand (RBNZ) in the coming months if things worsen significantly due to ongoing Brexit uncertainty.

The yield on benchmark 10-year bond, which moves inversely to its price fell 1 basis point to 2.355 percent in the last session, yield on 7-year note also dipped 1 basis point to 2.065 percent and the yield on short-term 2-year note ended steady at 2.015 percent.

The Reserve Bank of New Zealand released its annual statement of intent on Wednesday in which it reiterated that further easing could still be required.

They maintained that New Zealand's financial system remains sound and well placed to support economic expansion, but rapid increases in house prices and low dairy sector incomes pose financial stability risks.

Also, Governor Wheeler said that the bank is working to understand the current drivers of low inflation and the consequences for the economy and monetary policy. He further added that the Bank is implementing changes in response to the regulatory stocktake and reviewing key financial policies to best support the soundness and efficiency of the financial system.

Similarly, New Zealand Finance Minister English said Brexit may increase attractiveness of NZ dollar and if things worsen significantly, the RBNZ has room for a rate cut. The credit rating agencies remain quite positive on NZ economy, he added.

On the other hand, the NZ Prime Minister John Key has downplayed market expectations that Friday's Brexit vote makes it more likely the Reserve Bank of New Zealand will cut the official cash rate (OCR) again on August 11. Though, economists and financial markets increased their expectations the OCR will be cut again from 2.25 percent after Britain voted 51.9 percent to leave the European Union, with most seeing a cut as near certain. Financial markets are also pricing in higher chances of further cuts to 1.75 percent or beyond.

"I don't think so in the short term, primarily because what he's looking at is the strength of the economy," Key told Guyon Espiner on RNZ when asked if Brexit made an OCR cut by Governor Wheeler more likely in the short term.

"And if you look at his last Monetary Policy Statement he effectively had growth at a slightly stronger rate than the Treasury, he's north of 3 percent. I think he will look at the world markets. One could argue he's got room to move if he needed to," he said.

Lastly, Australia and New Zealand have agreed to work together on the "big issues" Brexit presents to both countries, including trade and immigration, Australia's Prime Minister Malcolm Turnbull said.

The New Zealand’s benchmark S&P/NZX50 Index closed up 87.63 points to 6,804.21.