RBNZ franks market rate rises

Anthony Byett — Fri, 11 Jun 2010 22:02:18 +0000

Putting aside the NZD for a moment, the following notes – in response to a query – look more generally at interest rate trends at present, and sources of information.

RBNZ raises Official Cash Rate (OCR) from 2.5% p.a. to 2.75% p.a., the first tightening move since the drop in 30-Apr-09. Wholesale interest rates changed only slightly, an example of markets anticipating an announcement – see ASB report. The market is anticipating the RBNZ to steadily raise the OCR in the months ahead, putting short-term wholesale interest rates around 1.5% higher in 12 months – see graph of futures pricing.
Retail interest rates have not as yet moved in response to the tightening but an adjustment in the Variable Home Loan Rate typically follows an OCR move (see ASB Home Loan Rate Report for wider view of mortgage rates and Good Returns for a comparison across financial institutions). The confirmation of the tightening phase should also see bank bill yields and short-dated Term Deposit rates trend higher, some of which is already happening (e.g. 6-month rates).
The general movement of interest rates and exchange rates over the week demonstrated the interaction – often mixed – of international and local forces. The 2-year swap rate actually declined Friday-to-Friday (see Westpac Morning Report), any small surprise element in the RBNZ announcement offset by a more general decline in global interest rates over the 7 days (that spanned the weaker-than-expected US jobs report). New Zealand longer-term rates tend to follow US rates, as do many other countries, with the premium on NZ 2-year government yields centring on 3% recently.
Conversely, the NZD rallied in response to the RBNZ announcement as well as before and after Thursday, the small local surprise element working in concert with the global shift to risky assets (that includes the NZD and AUD).

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RBNZ franks market rate rises