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New Zealand bonds strengthen following RBNZ’s dovish monetary policy statement

The New Zealand government bonds closed higher Friday as investors poured into safe-haven assets after the Reserve Bank of New Zealand 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 7 basis points to 2.410 percent, the yield on 7-year note ended 5 basis points lower at 2.135 percent and the yield on short-term 2-year note slid 1 basis point to 1.890 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 down 23.61 points to 7,288.99.

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