Markets price in 40% chance of OCR cut

Overnight Indexed Swap (OIS) pricing reflects the increasing probability the Reserve Bank could cut rates this year, despite the central bank's projection rates will go up next time they change.

In his latest note, Kiwibank economist Jeremy Couchman noted wholesale interest rates have trended down since November, with the 2 year swap rate hitting a record low of 1.92%. Couchman said "markets look sensitive to downside surprises" at present.

It comes as the US Federal Reserve indicated it would take a patient, rather than aggressive approach, to interest rate hikes this year. Meanwhile, concerns about the Chinese economy grew last week as inflation figures fell below targets. The developments have led markets in New Zealand to price in a downward OCR move.

Kiwibank still believes the central bank will keep the OCR at 1.75% this year, with gradual hikes to follow in 2020. Couchman told TMM Online: "We are more positive on growth this year than the RBNZ. But clearly risks to our view are to the downside not the upside at present."