RBNZ rate hike expectations pared back on US downgrade

Published: Mon 8 Aug 2011 12:50 PM
RBNZ rate hike expectations pared back on US downgrade
By Paul McBeth
Aug. 8 (BusinessDesk) – Markets aren’t so sure Reserve Bank Governor Alan Bollard will deliver a rate hike in September after the U.S. credit rating downgrade capped off a week of turbulence in financial markets.
Traders pared their bets Bollard on increases to the official cash rate to just 45 basis points over the coming 12 months, according to the Overnight Index Swap curve. That’s down from more than 100 basis points two weeks ago when he said there was “little need” to keep the stimulus from his 50 basis point cut in March, as he tried to shore up flagging business confidence in the wake of Canterbury’s February earthquake.
“Global financial markets’ volatility needed to be reduced before he would remove the emergency cut – that hasn’t happened,” said Robin Clements, economist at UBS New Zealand. Rate hike expectations are “wavering,” though it’s a “little premature to be hedging around this far out from September.”
The seven-year swap rate dropped 23 basis points to an 11-month low 4.505% after the after Standard & Poor’s cut the U.S. rating a notch to AA+, while two-year swap rates fell 31 basis points to 3.26%.
That came at the end of last week when the European Central Bank committed to buying Spanish and Italian debt, Japan’s central bank intervened in foreign exchange markets and stocks on Wall Street reported their biggest daily sell-off since 2008.
A spokesman for the Reserve Bank said the central bank was watching the global situation, but had not further comment.
New Zealand’s faster than expected economic recovery and surging prices for locally produced materials underpinned Bollard’s hint that a rate hike from 2.5% was imminent. That was supported by solid employment data last week, and slightly weaker wage data, which eased some underlying inflationary fears.
“The thing is, on the domestic side it’s still looking pretty good. It may well be that’s what carries the day,” Clements said. “We’ve still got very, very low rates.”
Clements says the turbulence may be a “blessing in disguise” for exporters who have been dealing with an excessively high New Zealand dollar. The kiwi recently traded at 83.46 U.S. cents, down from 84.43 cents at the end of trading in New York on Friday.
“It’s created a riskier environment, and risk-off trades will dominate. That’s not good for commodity currencies, it’s not good for the Aussie and kiwi, having gone to such punishing levels,” he said.
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