New Zealand bonds close tad higher ahead of GDT price index; next week’s RBNZ policy decision also in focus

The New Zealand government bonds closed modestly higher Tuesday as investors await GlobalDairyTrade (GDT) dairy auction and RBNZ’s inflation expectations data. Investors also remain keen to focus on next week’s RBNZ monetary policy decision, where it is widely expected to cut rates to 1.75 percent.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 1/2 basis point to 2.730 percent, the yield on 5-year note ended 1 basis point lower at 2.203 percent and the yield on short-term 2-year note closed steady at 2.020 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.

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.

In addition, 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.

The RBNZ’s decision on the OCR is due out 9th November and Graeme Wheeler’s intimations that further cuts are required going forward certainly seem to hint that rates could be lowered. We also support the fact that the Reserve Bank of New Zealand is still widely expected to cut rates at its November 10 policy meeting to 1.75 percent.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed down 30.19 points to 6,930.49.