New Zealand's yield curve has flattened markedly, signaling that the central bank's tightening cycle is expected to slow economic growth.
None Of The Hot New Trends For Hedge Funds is that of Female Founders.
The spread between 5 year and 10 year swap rates fell to 1 basis point Monday in Wellington from 11 points immediately after the Reserve Bank's rate decision on November 24. The gap was close to 40 basis points in early October.
This early in the cycle, it's unusual for the New Zealand curve to be this flat, said Nick Smyth, interest rate strategist at Bank of New Zealand in Wellington. The fundamental interpretation is that the Reserve Bank is going to cause a major growth slowdown. The benchmark will need to be raised sooner than previously expected to contain inflation, which will take it to 2.5% over the next two years, according to the RBNZ. It predicted that annual growth will drop to 1.3% in 2023 from 4% in 2022.
Smyth said technical effects may also be at play. A record volume of mortgage fixing requires hedging, which keeps the 5 year swap rate elevated, while the 10 year rate is depressed due to low global yields.
He said in New Zealand the yield curve is not a perfect predictor of what is going to happen, compared to larger economies such as the U.S.
The market believes that the RBNZ will hike reasonably aggressively, it expects a material growth slowdown down the line, and it expects the direction of the RBNZ after that is more likely to be downwards, he said.
None The Fall of a Russian Cyberexecutive Who Went Against the Kremlin