Reserve Bank's flat OCR outlook keeps swaps unchanged as kiwi climbs

Thursday 10th December 2015

New Zealand swap rates were largely unchanged, while the kiwi dollar jumped as much as 1 US cent after the Reserve Bank put the brakes on future interest rate cuts and signalled a three year pause.

The central bank cut the key rate a quarter-point to 2.5 percent, a level governor Graeme Wheeler said was enough to drive inflation back within its 1 percent to 3 percent target band. The kiwi jumped after the statement, recently trading at 67.35 US cents from 66.36 cents immediately before the release, with little prospect for further cuts removing a lid on the currency.

Wheeler later told Parliament's finance and expenditure select committee that he'll wait to "see what happens in the next few days" when quizzed on the rise.

That gain wasn't shared in the swaps market, which often moves in tandem with the currency, as the central bank kept its forecast track for the 90 day bank bill rate unchanged from the September monetary policy statement and extended the horizon out to the end of 2018. The two-year swap rate increased one basis point to 2.71 percent and 10 year swaps slipped two basis points to 3.56 percent.

"The statement gave every reason to keep rates about where they are. Rates have been very reluctant to push through this 2.5 (percent) lower bound which was indicated in the September meeting," said Sam Tuck, senior FX strategist at ANZ Bank New Zealand in Auckland. "They essentially wound back their concerns over the level of the kiwi dollar - they didn't link it to future OCR moves" which removed a barrier for the currency to gain, he said.

Deputy governor Grant Spencer told the parliamentary committee that the bank was seeing some shift in investments into equities paying regular dividends and away from low-yielding fixed interest products, though the bulk of saving was still largely in bank term deposits.

While keeping the forecast track for the OCR unchanged, the central bank sees a slower pick-up in inflation over the forecast horizon, with the consumers’ price index expected to rise to 1.2 percent on an annual basis in the March quarter next year, but taking until December 2017 before it hits the bank’s 2 percent target, something it had previously anticipated occurring in September of next year.

Earlier in the day, chief economist John McDermott said it appeared that the long lags between monetary policy action and its effect was becoming even longer than the 12 to 18 months traditionally expected.

BusinessDesk.co.nz

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