Lower and flatter

NZ inflation moderating on lower oil prices, UST 10yr yields fall, eyes on Wheeler comments on inflation targeting

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NZ inflation moderating on lower oil prices, UST 10yr yields fall, eyes on Wheeler comments on inflation targeting

1st Dec 14, 8:03am by bnzeconomists

By Kymberly Martin

The NZ curve flattened a little further on Friday.

On Friday night, US 10-year yields slid to end the week at 2.16%.

On Friday, NZ 2-year swap closed little changed at 3.88%. It appeared little moved by further strengthening in the ANZ business survey, as inflation indications in the survey moderated. This suggests little to alarm the RBNZ, and is consistent with our view the Bank remains on hold for most of next year.

On Friday we also downgraded our expectations for Q1 2015 CPI, on the back of plunging crude oil prices. We now see CPI at 0.9%y/y for this quarter and next (below the bottom of the RBNZ’s 1-3% target band). This will once again allow the Bank plenty of breathing space before raising rates again.

Meanwhile, longer-dated swaps declined on Friday, following offshore moves. The 2-10s swap curve has flattened to 44 bps. We expect this to attract further corporate paying out the curve.

Our medium-term view remains for curve steepening in 2015.

On Friday night, while German 10-year yields hugged historic lows at 0.70%, US equivalents subsided. On re-opening after Thursday’s US Thanksgiving holiday, US 10-year yields slipped from above 2.24% to end the week around 2.16%.

Today will kick off with a speech by RBNZ Governor Wheeler at 8.45am, at the start of a conference on Inflation Targeting. The topic remains very relevant for a Bank that has been consistently surprised recently by lowside inflation readings. Look out for any titbits that may leak out from this conference into the public domain.

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Source: NZFMA

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1 Comments

by Stephen L | 1st Dec 14, 8:29am 1417375744

That Mr Wheeler is giving a speech on inflation targetting is a good thing, assuming he either tries to make a case for it, or he makes a case for adding to it. Given most of the world has added to their targets, with either employment or current account or GDP targets of some sort, the inflation and "bank stability" only targets we have seem severely sub optimal. If there are good reasons for restricting the targets to those in a world of vast foreign money printing and asset bubbles, the case has never been well made, publicly at least.

Wheeler has probably tried to address a few things using the bank stability target, but there are significant limits to limiting say foreigners buying up NZ at the expense of our trading industries (through the exchange rate effect of the incoming money purchasing the assets) purely on the basis of bank stability. If the foreigners have the money, then buy away seems the policy.

Hopefully he will look to add to the targets therefore.

The article hints at his speech being confidential in some way. You often get the feeling that the public can't be trusted with understanding monetary policy. It can therefore be tempting to conclude that there are other interests pulling the strings- foreign banks and financiers for example. Hopefully in this case details will not only "leak out" but actually be published.