BNZ pushes out its expectations of when the next RBNZ rate hike will happen, and lowers the expected peak

By Kymberly Martin

The NZ curve steepened a little further yesterday.

Overnight, US 10-year yields traded between 2.28% and 2.33%.

The RBNZ delivered a more dovish message than at its September meeting, and acknowledged recent low-side inflation readings. It left the slightest hint of a tightening bias with its statement; “inflation is expected to increase as the expansion continues”.

That said, the Bank is clearly now on hold for an extended period.

We now see them resuming rate hikes next December, and have lower the expected peak in the OCR to 4.25% (from 4.50%) in early 2016.

But none of this seemed to come as too much of a surprise to the market. NZ short-end yields had already been drifting lower in recent weeks.

On the day, 2-year swap closed down 2 bps, at 3.88%.

The influence of the US Fed’s earlier meeting was seen at the longer end of the curve. NZ 10-year swap closed up 2 bps, at 4.42%. The 2-10s curve now sits at 54 bps. We see the curve as biased to steepen further over the medium-term, as the short-end remains range-bound but long-end yields drift higher approaching Fed rate hikes.

Overnight, despite US Q3 GDP surprising to the upside (3.5% q/q ann. vs. 3.0% expected), US yields were relatively range-bound. 10-year yields trade mid-range, at 2.31%, currently.