Rates Strategist: Pace of RBNZ easing to slow
• After three consecutive 50bp reductions in the OCR, the pace of RBNZ easing is expected to moderate going forward. We expect sequential 25bp cuts to 2.75% by the August MPS. Our forecast is below market pricing for the terminal cash rate, and we maintain a modest downside bias for front end rates. Governor Orr’s unexpected resignation doesn’t materially alter the outlook for monetary policy.
• Bank balance sheet pay side flow in the swap market is picking up as 2-year fixed mortgage rates reach a fresh low for the easing cycle. Even accounting for the large skew in the aggregate mortgage book towards short tenors, we are sanguine about the potential market impact. Monthly data going back over twenty years doesn’t suggest a significant relationship with 2Y swap spreads when there are large composition shifts towards longer fixed rate mortgages.
• NZ Debt Management will launch a tap syndication of the May-2032 nominal line before the end of April. The execution window aligns with technical NZGB demand associated with the April-2025 maturity alongside coupon flow. The swap spread widening trend paused after the announcement, with the market again focussed on upcoming supply, relatively soon after the May-2035 tap in February.
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Swap spread recovery to be tested by supply
• The RBNZ is expected to reduce the OCR by a further 50bp at the February Monetary Policy Statement. Beyond this, the pace of easing will likely moderate and become increasingly data dependent. On-target inflation and still weak activity, suggest the RBNZ will cut rates to at least the mid-point of its 2.5% - 3.5% estimate, for the long-term neutral OCR.
• We have a modest downside bias for front end rates, though note the easing cycle is increasingly well priced. Longer end rates are likely to trade in a broad range. The 2y/10y swaps curve looks set to extend beyond the 70bp January high, as the RBNZ easing cycle progresses, and term premia build.
• Strong investor demand for NZGBs in January, after the seasonal issuance lull, has contributed to a sharp recovery in the 10y swap spread. Confirmation that the tap syndication of the May-2035 nominal line will take place in February, should contain the move higher in swap spreads, with the current level near -45bp likely to mark the top end of the trading range.
Full Interest Rate Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.