Bank's rate catches market on the hop
The Reserve Bank caught most of the market on the hop yesterday when it set its first official cash rate at 4.5 per cent.
Wednesday, March 17th 1999, 12:00AM
The Reserve Bank caught most of the market on the hop yesterday when it set its first official cash rate at 4.5 per cent.
The rate is 0.5 per cent higher than market expectations and indicates the bank doesn't subscribe to the theory inflation is dead.
Brokers CS First Boston says the market initially interpreted 4.5 per cent as hawkish, however deeper analysis of the bank's monetary policy statement revealed that its projection for the next few years are actually quite soft, and it does not see a significant rise in rates until well into 2001.
The Yield Curve
Source: JB Were
The bond curve as expected flattened significantly on the back of this with 2001s closing 1 point higher while the long closed down 8 points.
BT Funds Management economist David Plank says the key aspect of the monetary policy statement is the projected track for interest rates. He says 90 day bills are forecast to remain around the 4.6 per cent for the next two years indicating the bank doesn't see much change in the rate over this period.
"We think the OCR is likely to remain at 4.5 per cent for at least the next two RB meetings (April 21 and May 19) – unless the exchange rate weakens substantially."
A stable cash rate will benefit the long end of the yield curve, he says.
"We remain of the view that the spread between NZ and US 10-year bonds will move under 50 basis points, while the spread between NZ and Australian ten-year bonds should be eliminated."
He says, in time, the short end may also benefit from a stable OCR, and it may flatten in time.
"If the RBNZ holds the OCR steady at the next couple of meetings the New Zealand curve may take on a shape closer to that in Australia," he says.
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