New Zealand bonds strengthen as RBNZ hints at further easing, keeps policy rate steady

New Zealand government bonds closed higher Thursday after the Reserve Bank of New Zealand left its official cash rate unchanged at a record low of 2.00 percent. Also, the central bank in its monetary policy statement hinted at lowering its key interest rate further due to persistent weak consumer inflation, strengthening NZ dollar and a depressed dairy sector.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 15 basis points to 2.480 percent, the yield on 7-year note ended 11 basis points lower at 2.185 percent and the yield on short-term 2-year note slid 9 basis points to 1.915 percent.

The RBNZ left the OCR unchanged at 2.00 percent as was widely expected. Much of the language in today’s statement was repeated from August, indicating that the RBNZ remains on track for an OCR cut at the November review. Despite solid economic growth, the RBNZ faces an uncomfortably slow return to the inflation target, with the risk that this could drag inflation expectations even lower, reported Westpac in its report.

We foresee that the central will hold its key interest rate until it examines the upcoming third quarter inflation, which is scheduled to release in late October. However, given the current market situation 25 basis points cut in November is widely anticipated among the investors.

On Wednesday, dairy prices in the latest Global Dairy Trade auction declined to 1.7 percent following a rise of 7.7 percent at the previous auction. Also, milk prices declined by 0.2 percent following a 3.7 percent in the last auction.

Meanwhile, the New Zealand’s benchmark S&P/NZX50 Index closed up 30.54 points to 7,311.71.