The rising trend in wholesale interest rates shows the financial markets are willing to look through what is likely to be a sharp decline in economic activity over the current quarter, analysts said.
The markets are factoring in a 100 per cent chance of a 25 basis point hike in the official cash rate (OCR) from the Reserve Bank on October 6 and, following the stronger-than-expected GDP result last week, the odds of a 50 basis point hike have risen.
Key one-year and two-year swap rates – which have an influence over fixed mortgage rates – have continued their march higher.
Tomorrow’s speech from assistant Reserve Bank governor Christian Hawkesby is expected to throw more light on the bank’s thinking, following its decision in August 18 to leave the OCR unchanged at 0.25 per cent.
Notes for the speech – titled “A least regrets approach to uncertainty” -will be released at 9am.
Central bank watchers expect Hawkesby to outline the types of uncertainties faced by the bank as it sought to offset the impact of the Covid-19 over the past 18 months.
Fisher Funds senior portfolio manager – fixed income and cash – David McLeish expects the theme will be along similar lines to what Hawkesby and chief economist Yuong Ha have been saying since the August decision: that the economy leading into this lockdown was very strong.
“Given the experience of the last year, the economy comes out of the gates pretty quickly when restrictions are removed,” McLeish said.
Interest rates had been on the move even before the latest stronger-than-expected GDP data, which showed a 2.8 per cent gain over the June quarter, was released.
Today the one-year swap rate trades at 1.2 per cent, up from 1.0 per cent at the start of the month, and up from 0.4 per cent in June.
The two-year swap rate is at 1.5 per cent, from 1.25 per cent early in the month, and from 0.5 per cent in June.
The one and two-year part the curve have an influence on mortgage rates, but muddying the waters somewhat is the Reserve Bank’s funding for lending programme, which allows banks access to funds at rates not exceeding the OCR.
The interest rate market’s closely followed overnight index swap rate implies the official cash rate will be at 1.3 per cent by May next year.
At the long end of the market, New Zealand 10-year Government bond yields have remained elevated at 1.92 per cent but off their recent peak of just over 2 per cent, which was the highest point since April 2019.
McLeish said the bond market had become more volatile since the Reserve Bank wound back its large scale asset purchase programme – quantitative easing – in June.
ASB chief economist Nick Tuffley expects a quarter of a point move up in the OCR on October6, and at each of the ensuing two meetings.
“The market has become adjusted to the idea that the Reserve Bank is likely to lift interest rates here, yet in Australia interest rate increases look pretty distant,” he said.
“In the US, their next step is to slow down bond purchases and they are a long way off lifting interest rates,” he said.
The New Zealand dollar, while off its recent peaks, had stayed resilient at over US$70c and was strong against the Aussie at A97c.
ASB expects GDP in the current quarter to fall by 8 per cent before rebounding by 9 per cent in the following quarter.
“The prospects look pretty good, notwithstanding what we are going through at the moment,” he said.
Tuffley expected Hawkesby to talk about the longer-term view of Covid-19 and the disruption caused by it – periods of volatility, restrictions, and the need to look at the bigger picture.
“At the moment the risk/regrets policy of the Reserve Bank has shifted from just wanting to ensure that the economy was propped up and that as many people as possible were kept jobs,” he said.
“Now, the dynamic had switched the other way, to the Reserve Bank needing to be quite cognisant of the risk that inflation pressures really do take off on a persistent level,” he said.
“So the dynamic has shifted.”
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