By Kymberly Martin
NZ swap and bond yields closed down 1-3bps on Thursday, ahead of Friday’s ANZAC day holiday. Thursday morning, the RBNZ raised the Official Cash Rate (OCR) by 0.25% .
The cash rate now sits at 3.00%, 0.50% above its historic lows, but still some way below what the RBNZ considers to be ‘neutral’ (circa 4.25%).
The accompanying statement was similar to that published in March. It emphasized strong NZ economic momentum. However, it also acknowledged the recent decline in dairy prices.
As expected, the Bank had a little more to say about the currency. The Bank reiterated it does not believe the exchange rate at the current level is sustainable.
However, it stated that the speed and extent of future rate hikes will be influenced by “emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressures”.
However, the central message remains unchanged. The Bank is keen to get the OCR back toward ‘neutral’ as soon as practical. This was clearly expressed in the RBNZ’s comments that it is “necessary to raise interest rates towards a level at which they are no longer adding to demand”.
However, the market reacted to the implication the elevated exchange rate could slow the pace of hikes. NZ swaps closed down 1-3bps. 2-year and 10-year now sit at 4.03% and 4.95% respectively. The yield on NZ 10-year bonds ended the week at 4.48%, its lowest level this year.
On Friday night, in the backdrop of soft global equity markets, US 10-year bond yields briefly dipped toward 2.64%, before ending the week at 2.66%.
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