by Kymberly Martin
We returned from the ANZAC day holiday to the US Federal Reserve announcement. Today we look toward the RBNZ meeting.
The Fed had slightly upgraded its forecasts for US growth and down-shifted its forecasts for unemployment this year. It also revised up inflation expectations in the year ahead from a 1.5-1.8% to a 1.8%-2.0% range. However, the Fed said that strains in the global financial markets continued to pose “significant downside risks” to the economy.
In terms of policy, the Fed gave no signs of intending to extend its quantitative easing, but to maintain its current program. But in questioning, Chairman Bernanke emphasised that the Fed stands ready to use whatever tools necessary, if the outlook deteriorates.
The statement reiterated conditions “are likely to warrant exceptionally low levels for the Fed funds rate at least through late 2014”. However, as previously shown, there was a very wide range of opinion amongst individual committee members. 7 members voted for a first rate hike in 2014, and 6 members voted for an earlier start to the hiking process.
The response from US 10-year bonds was relatively muted. Yields slipped a fraction after the statement to trade around 1.98% currently. German equivalents hover around 1.74%. Overnight, in the backdrop of slightly better risk sentiment and buoyant European equity markets, peripheral European spreads to German bonds have narrowed.
Today’s focus will be the RBNZ meeting. The RBNZ is widely expected to keep the OCR at the historic low of 2.50%.
The market currently prices only 4 bps of rate hikes in the year ahead. We continue to expect a first 25bps hike in December in line with indications in the March MPS.
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