New Zealand bonds gain after RBNZ slashes OCR to record low while hinting at further easing

The New Zealand bonds gained Friday after the Reserve bank of New Zealand lowered its official cash rate (OCR) to a new record low of 2 percent in wake of depressing headline inflation and subdued economic growth.

Also, the central bank’s board members hinted at easing monetary policy in the near future to make consumer inflation stable within the RBNZ’s target band.

The yield on the benchmark 10-year bond fell 3 basis points to 2.160 percent and the yield on 7-year note also dipped 3 basis points to 1.870 percent and the yield on short-term 2-year note slid 2-1/2 basis points to 1.765 percent.

The RBNZ in its Thursday’s monetary policy meeting lowered its official cash rate (OCR) by 25 basis points to a fresh record low of 2.00 percent. This decision was widely expected by the market participants and economists.

In the RBNZ in its Monetary Policy Statement mentioned that global growth is below trend despite being supported by unprecedented levels of monetary stimulus and significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation.

The central bank further mentioned that weak global conditions and low-interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate and the trade-weighted exchange rate is significantly higher than assumed in the June Statement.

The dwindling inflation stands to be the main factors behind the decision to cut rates. Headline CPI inflation rose just 0.4 percent q/q in Q2, below consensus expectations and the RBNZ’s 0.6 percent pick. Annual inflation was unchanged at 0.4 percent y/y, which is the seventh consecutive quarter below the bottom of the RBNZ’s target range. Similarly, tradable prices also increased tad 0.6 percent q/q while non-tradable inflation was up a modest 0.3 percent q/q (although the latter lifted 0.5 percent q/q in seasonally adjusted terms).

In terms of recent economic data release, New Zealand’s second quarter retail sales increased 2.3 percent q/q, higher than the market consensus of 1.0 percent, from 0.8 percent in the first quarter of 2016.

On the other hand, New Zealand’s July manufacturing PMI fell to 55.8, as compared to 57.7 in June. Additionally, employment came in at 54.6, the fifth consecutive monthly increase in activity & highest for this sub-index since October 2014.

Lastly, the Reserve Bank of New Zealand Assistant Governor John McDermott said that markets missed the downside risks to the outlook for interest rates presented in Thursday's policy meet. He said the RBNZ highlighted two alternative scenarios in its statement, and both of them were on downside risks to rates.

Looking ahead, we foresee that if inflation fails to improve over the coming months, the country’s apex bank may ease rate to 1.5 percent further before December. The RBNZ's next official cash rate review is scheduled to take place on September 22.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 9.27 points to 7,363.10.