New Zealand bonds close higher as investors anticipate RBNZ to cut rate

The New Zealand government bonds closed higher on Friday 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 1-1/2 basis points to 2.200 percent, the yield on 7-year note also dipped 1-1/2 basis points to 1.925 percent and the yield on short-term 2-year note ended 1-1/2 basis points lower at 1.805 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.

In addition, the RBNZ Governor Graeme Wheeler hinted a rate cut was imminent in his unscheduled economic update last month saying "further easing was likely".

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 10.34 points to 7,308.42.