Yellen concerned about asset prices and impact on financial stability, which may outweigh inflation in future rate decisions

By Jason Wong

NZ rates were significantly higher on Friday, with the 2-year swap rate up 3 bps to 2.32% and the 10-year rate up 8 bps to 3.405%. 

This was driven by global forces, including higher Australian rates, and the path of least resistance remains for higher rates to come, more so at the long end of the curve.

The key focus in the week ahead is Fed Chair Yellen’s testimony to the US Congress and Senate.  Friday’s US monetary policy report didn’t contain a lot new, although there was a restatement of plans to continue to tighten policy.

There appeared to be an enhanced interest in financial stability concerns – citing stretched valuations in bond, equity, and commercial real estate prices – which was also one of the takeaways from the FOMC minutes last week.

Yellen might choose to draw this out in her testimony, which would provide some rationale for higher rates even if the inflation backdrop wasn’t as strong as desired.

Germany’s 10-year rate closed at its highest level since the end of 2015, up 1 bp to 0.57%, while French, Italian and Spanish 10-year rates were up in the order of 2-8 bps. A number of members of the ECB governing council were on the wires, highlighting differing tones regarding the policy outlook.  The ECB’s Praet was on the dovish side, indicating that “underlying inflationary pressure remains subdued” and “we still need a long period of accommodative policy.” Knot highlighted the risk of “carrying on for too long” with money printing, while Villeroy de Galhau suggested another tweak to the ECB’s policy guidance “in the fall” to reflect the euro-area’s upturn.

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