RBNZ Monetary policy: Markets are pricing in tightening - Westpac

Imre Speizer, Research Analyst at Westpac, suggests that the markets will always attempt to pre-empt future central bank actions, which is why pricing for future RBNZ meetings now implies tightening.

Key Quotes

“That is despite a clear signal from the RBNZ that it intends sitting on hold for a long time. The logic seems to be that with an easing cycle now complete, the next cycle must be a tightening one. There is a 56% chance of a hike by Nov-17, and 100% chance by Mar-18, according to OIS prices. Can markets become even more hawkish? Yes. Previous easing cycle endpoints were characterised by a 2yr-OCR spread of 60bp-80bp, suggesting the current 50bp spread could rise even further. One obvious catalyst would be evidence of higher inflation, either domestically or globally.”

“Swap rates: mainly a US story now

With the RBNZ on hold now at 1.75% for probably a long time, swap rates across the curve are taking the lead from mainly US bond yields. The NZ 2yr is in a 2.15%-2.35% range (defined earlier this year), and more likely to test the top than the bottom next week. The US catalyst for this could be market pricing for the Fed increasing from only one hike in 2017. The NZ 10yr will follow the US 10yr, the latter looking stretched and in need of consolidation which means the NZ 10yr is unlikely to breach 3.45% next week.”