Trying conditions: People wading through flood waters in the city of Napier after Cyclone Gabrielle cut a trail of destruction across northern New Zealand. Rate hikes are expected to be placed on pause as the nation deals with the dramatic weather conditions. — AFP
AUCKLAND: There are a number of compelling reasons for traders to keep cutting back bets on future New Zealand interest-rate hikes even as policy makers are set to tighten again this week.
The aftermath of Cyclone Gabrielle that devastated wide swathes of the North Island last week and signs consumer-price pressures are easing around the world may prove enough to offset the central bank’s urge to push up the benchmark rate to a peak as soon as possible.
Governor Adrian Orr and his colleagues may go as far to acknowledge those factors when they meet tomorrow.
Two-year swaps – which traders use to bet on where the Reserve Bank of New Zealand’s (RBNZ) benchmark will be at the end of that period – have fallen to 5.085% from as high as 5.25% last week as markets factored in the impact of the cyclone.
They were as low as 4.70% in early February.
The contracts will potentially drop back to 4.7% over the next month, according to Imre Speizer, a market strategist at Westpac Banking Corp in Auckland.
“Two-year swaps will be volatile, influenced by not only expectations about the RBNZ monetary policy statement, but also offshore events,” he said.
At the start of last week, investors saw the chance of RBNZ raising rates by 50 or 75 basis points at tomorrow’s meeting was a coin toss.
There are now just 46 basis points of rate hikes priced in, according to data compiled by Bloomberg.
The central bank will raise its key rate by 50 basis points to 4.75%, according to the median estimate in a Bloomberg survey of economists.
“We’ve obviously seen a softening in the economy that’s likely to be exacerbated to some extent” by the cyclone and the floods in Auckland, finance minister Grant Robertson said last Friday in Auckland.
Rate hikes should be placed on pause as the nation deals with the dramatic weather conditions, according to economists at Kiwibank.
“The RBNZ can come back in April and resume tightening if required,” they said in an emailed note last week.
The odds of further tightening from the RBNZ is also dropping on signs inflationary pressures that have bedeviled global economies over the past year look to be topping out.
“There is evidence there that we’ve got over that hump” in inflation “but monetary policy makers face the same uncertainty that we do as fiscal policy makers,” Robertson also said Friday.
Once the RBNZ meeting is out of the way, swap traders will turn their attention across the Tasman, with investors still undecided about whether the Reserve Bank of Australia (RBA) will raise rates by another 25 basis points in March to contain inflation.
New Zealand swaps are likely to follow their Australian counterparts lower if the RBA shows signs of being less hawkish. — Bloomberg
