BNZ now expects first rate hike in December rather than September

by Kymberly Martin

The RBNZ kept rates on hold at 2.50% yesterday, as expected. It also pushed back the implied starting point of its rate hiking cycle from September to December, as anticipated.

However, the implied trajectory thereafter was flattened. The Bank now sees the peak in the OCR being somewhere around the 3.50% level, at the end of 2014.

We have formally pushed back our expected first rate hike from September to December also. However, we maintain our view that the OCR will eventually peak around 4.25%, but not until mid 2014.

Swap yields initially declined after the announcement, but closed little changed yesterday. 2-year swaps closed at 3.03%, still within its range of the past few weeks.

The 2s-10s curve currently sits around 134bps. Bond yields also initially fell after the RBNZ meeting by up to 4bps, but soon climbed their way back. Yields closed down just 1-2bps across the curve.

The yield on NZGB 21s sits at 4.09%, currently 208bps and 15bps above US and AU equivalents, respectively. This has marked the top of the NZ-AU 10-year trading range since November.

In the near-term therefore, we expect NZ bonds to outperform their AU counterparts. This should also help underpin demand for NZ bonds at today’s DMO auction, of 100m 19s and 150m 23s.

Overnight, the Bank of England, Bank of Canada and ECB all kept rates unchanged. The BoE did not announce any changed to its QE program.

Greece was seen creeping closer to its debt swap targets, with news the uptake of the program by private sector may have reached 75%. German “safe haven” 10-year yields stabilised around the 1.80% level.

US equivalents traded up from 1.97% to 2.01%. Italian 10-year yields traded down to 4.81%, their lowest level since last June.