Damien McColough, Head of Rates Strategy, explained that the RBNZ’s dovish shift in stance is arguably the biggest surprise to hit NZ interest rate markets this year.
Key Quotes:
“There was much chatter in the markets earlier this year on the topic of new RBNZ Governor Adrian Orr’s “style” – was he likely to be a dove or a hawk or neither. The consensus then was that the latter could probably be ruled out, and that view is starting to appear correct. We strongly suspect that the new regime will be keener to shore up GDP growth when it flags, and more willing to take a risk when inflation is rising. Essentially, the RBNZ has become more dovish. We don’t expect it to go as far as cutting the OCR unless the economy or housing market slows further than we expect, which means low NZ interest rates will be a feature for a very long time.”
“The close relationship that long-end NZ yields used to enjoy with long-end US yields has broken down over the past year. US 10yr yields have risen over that period, but NZ 10yr yields have fallen (first chart). The degree of “breakage” is evident from a history of rolling correlations (second chart). After the smoke had cleared from the GFC, the correlation between the two was high, with the sensitivity of NZ 10yr yields to changes in US yields typically ranging between 0.7bp-1.0bp to one. But since late 2017, NZ markets have increasingly paid attention to NZ monetary policy matters. Our own outlooks for NZ yields have been tweaked accordingly, no longer expecting a strong response to any further rise in US bond yields. Any NZ curve steepening will be modest, the 2-10yr swap likely to be bound by 80bp-110bp.”
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