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11 Jun 2014
RBNZ scenario analysis - Westpac
FXStreet (San Francisco) - According to Imre Speizer, FX Strategist at Westpac, the RBNZ is expected to hike the OCR by 25bp to 3.25%, adding that expectations for a significant downgrade in the RBNZ's rate forecasts will be disappointed.
Key Quotes
In today's Monetary Policy Statement (MPS), we expect the OCR to increase by 25bp to 3.25% and think that market expectations for a significant downgrade in the RBNZ’s interest rate forecasts will be disappointed.
The data flow since the last MPS has been mixed. Soft inflation and wage costs, lower dairy prices and a high NZD have been offset by stronger migration, lower mortgage rates, and a fiscal impulse. The net effect, in our estimation, should be a 10bp reduction in the RBNZ’s interest rate track (at the two-year ahead point). However, markets are currently implying a 50bp reduction.
If the track is lowered by less than 15bp, then the 2yr swap rate should rise by at least 7bp. This is our hawkish scenario below, and is the one which we assess has the highest chance of occurring (55%).
If the track is lowered by between 15bp and 25bp, then the 2yr swap rate should only rise up to 2bp. This is the scenario we envisage would cause the least market disturbance (labelled "neutral" below). However, we see only a 30% chance of it occurring.
If the track is lowered by more than 25bp, then the 2yr swap rate should fall by at least 9bp. Such an track would be seen by the market as an endorsement of current pricing and provide a green light for accrual trades. We don’t believe the RBNZ would desire such an outcome and only assign it a 15% chance.
OIS pricing currently implies a 96% chance of a hike tomorrow, an OCR of 3.34% by July’s meeting, 3.38% by September and 3.59% by December 2014.
Key Quotes
In today's Monetary Policy Statement (MPS), we expect the OCR to increase by 25bp to 3.25% and think that market expectations for a significant downgrade in the RBNZ’s interest rate forecasts will be disappointed.
The data flow since the last MPS has been mixed. Soft inflation and wage costs, lower dairy prices and a high NZD have been offset by stronger migration, lower mortgage rates, and a fiscal impulse. The net effect, in our estimation, should be a 10bp reduction in the RBNZ’s interest rate track (at the two-year ahead point). However, markets are currently implying a 50bp reduction.
If the track is lowered by less than 15bp, then the 2yr swap rate should rise by at least 7bp. This is our hawkish scenario below, and is the one which we assess has the highest chance of occurring (55%).
If the track is lowered by between 15bp and 25bp, then the 2yr swap rate should only rise up to 2bp. This is the scenario we envisage would cause the least market disturbance (labelled "neutral" below). However, we see only a 30% chance of it occurring.
If the track is lowered by more than 25bp, then the 2yr swap rate should fall by at least 9bp. Such an track would be seen by the market as an endorsement of current pricing and provide a green light for accrual trades. We don’t believe the RBNZ would desire such an outcome and only assign it a 15% chance.
OIS pricing currently implies a 96% chance of a hike tomorrow, an OCR of 3.34% by July’s meeting, 3.38% by September and 3.59% by December 2014.