New Zealand bonds close modestly higher ahead of RBNZ's survey of inflationary expectations

The New Zealand government bonds closed modestly higher Tuesday as investors remained cautious ahead of the Reserve Bank of New Zealand’s (RBNZ) survey of inflationary expectations report, scheduled to be released next week, which could be the catalyst for rate cut from the central bank.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 1 basis point to 2.610 percent, the yield on 7-year note ended ½ basis point lower at 2.288 percent and the yield on short-term 2-year note slid 1 basis point to 1.955 percent.

The key for how dovish the RBNZ’s forward guidance will be on the 10th November Monetary Policy Statement will be the result of their inflationary expectations survey on Wednesday, November 2, said Roger J Kerr, a fixed income advisor, reported interest.co.nz.

If it appears that super low actual inflation over recent years has transferred through to be imbedded in super low inflationary expectations two years ahead in time, then the RBNZ will have no choice but to cut the OCR to 1.75 percent and signal clearly that they will cut again unless inflationary expectations lift, he added.

Last week, New Zealand’s third-quarter consumer inflation rose by 0.2 percent, higher than the market expectations of flat outcome, from up 0.4 percent in the previous quarter. On an annual basis, inflation dropped to 0.2 percent, the eighth straight quarter below 1 percent. However, we foresee that inflation reading was not far from the central bank's expectation, and will not stand in the way of it cutting the official cash rate again in November.

Moreover, the Reserve Bank had forecast a 0.1 percent increase in its August Monetary Policy Statement. The annual inflation rate slowed from 0.4 percent to 0.2 percent, just above the record low of 0.1 percent that it briefly touched in December last year, reported Westpac in its Research note.

We also support the fact the Reserve Bank of New Zealand is still widely expected to cut rates at its November 10 policy meeting to a new record low of 1.75 percent.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 44.47 points to 7,002.87.