But since the Gulf crisis, the volatile overnight indexed swap (OIS) market now points to a 70% chance of a 25-basis-point rate hike from the Reserve Bank by July, and a 100% chance of another quarter pointer by September.
Since the US and Israel launched their attacks on Iran, the two-year swap rate has risen to 3.3% from 2.95%, while 10-year Government bond yields have gone to 4.6% from 4.27%.
Westpac’s head of New Zealand strategy Imre Speizer said it looked like interest rates, particularly in the short end of the yield curve, had run too far.
“The risk is in a few days’ time that those could be chopped right back,” Speizer told the Herald.
“The short end has been quite volatile and probably does not deserve to be as high as it is.”
Local wholesale interest rates had followed overseas rates, particularly US and Australian short and long-term rates, higher.
“For shorter maturities, you probably can quibble with it because our Reserve Bank is in a different situation to those overseas ones because our economy has got a much weaker starting point, and we’re still at the very early stages of a fragile economic recovery,” Speizer said.
“They [the markets] have gone overboard and I’m guessing that those short-term rates will maybe pull back a bit while those long-term rates might stay highish.”
Speizer said there will be pressure on the Reserve Bank to “look through” the likely impact of high oil prices on inflation as the local economy was more “skewed to the downside” than its overseas counterparts.
“Inflation is running hotter but the economy is running colder,” he said.
“Because the economy is so weak to start with they will err on the side of trying to assist the economy rather than just trying to get inflation down.”
ANZ Bank said “stagflationary sentiment” was dominating markets after the oil price spike.
“Central banks have a lot to consider, but for now we think that well-anchored inflation expectations will afford policymakers time to assess how inflation unfolds and importantly the pass-through from higher energy costs to the broader inflation complex,” ANZ said in a commentary.
“We expect cautious, but not overly hawkish guidance from the raft of upcoming central bank meetings.”
The RBNZ’s next announcement on the OCR is due on April 8.
Meanwhile, the price of oil slid below US$90 a barrel today after surging to nearly US$120 early in the trading session as markets latched on to US President Donald Trump’s comment the Iran war would be over soon.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
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