sign up log in
Want to go ad-free? Find out how, here.

RBNZ sensitivity to house price risks may restrain their OCR cut appetitie, but they will likely cut anyway: BNZ

Bonds
RBNZ sensitivity to house price risks may restrain their OCR cut appetitie, but they will likely cut anyway: BNZ

By Jason Wong

The short-end of the NZ swap curve pushed 3-4 bps higher yesterday. The latest LGFA tender attracted strong demand.

Overnight, US 10-year yields drifted down to 1.73%.

In the release of the Financial Stability Report yesterday morning the RBNZ made clear that it believes financial stability risks have increased over the past six months. It remains particularly focused on pressure in the Auckland housing market and rising house price appreciation elsewhere.

No new macro-prudential tools have yet been announced. However, the Bank suggested it is looking at the likes of debt-to-income limits on bank’s mortgage lending. Consultation with the Finance Minister would need to take place, so any such measures are likely at least six months from implementation.

As was to be expected, the RBNZ made no direct comments on monetary policy. However, its heightened sensitivity to risks in the housing market would argue against looking for aggressive further OCR cuts.

We remain comfortable with our view that the Bank will likely cut again at its June meeting, with a further cut after that a line-ball call. The market looks for the OCR to be cut below 1.80% within the year ahead, from 2.25% currently. Consistent with this view, NZ 2-year swap closed at 2.17% yesterday. NZ 10-year swap closed little changed at 2.82%.

The LGFA’s (Local Government Funding Agency) latest tender was very well received yesterday. The relatively small total tender size of NZD75m attracted an average bid-cover ratio of more than 3x. The average successful yield at tender was inside where the bonds were marked pre-tender. LGFA2023s trade around 85bps over NZGBs providing some attraction in a low yields world.

Overnight, US 10-year yields have drifted lower, despite a rise in the global oil price. Yields now trade at 1.73%. This is toward the lower-end of the 1.65-2.00% range we see containing yields in coming months.

Daily swap rates

Select chart tabs

Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
Opening daily rate
Source: NZFMA
 

Jason Wong is on the BNZ Research team. All its research is available here.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

2 Comments

LGFA2023s trade around 85bps over NZGBs providing some attraction in a low yields world.

Some would say a necessity given a possible price move back to recent yield highs (~2.97%) in the NZGS 4.5% 27's would wipe out ~three quarters of the handsome 4.5% annual coupon.

Up
0

We remain comfortable with our view that the Bank will likely cut again at its June meeting,..

Why? - because the stalled inflation metric below a predetermined central bank target demands as much?

Inflation is a complicated subject that has been devalued as if it were simply some variable in an equation. It starts with the very premise itself, as if an index of a bucket of consumer prices equals a comprehensive review of the subject. As Irving Fisher realized more than a century ago, money can go into places beyond any CPI’s reach. Not all “inflation” is therefore equal, though orthodox monetary theory has hardened rules for it. Inflation in consumer prices is always good but only so long as it isn’t “too much” where central bankers and economists get to define that limitation without actual economic input.

Deflation is always bad and monetary, on the other hand, even though there is a tremendous difference between falling prices due to dramatic overcapacity and prices coming down in the virtuous cycle of innovation and capital efficiency. Thus, capitalism might provide lower “inflation” through technology that central banks then turn into the “need” for more “accommodation” yielding but great distortion. Read more

Up
0