Rates Rise As RBNZ Hits The Accelerator

The RBNZ surprised already bearish expectations with its terminal rate guidance. Market rates are likely to rise in the short term, with risks skewed to steeper curves if data prompts participants to push out the policy reversal that is currently priced. Inflation risk premia should fall containing long term duration risks.

· We expect a measured rise in NZGB yields and swap rates into Q1, before rates consolidate and start moving lower in H2 2023. In the short term, we expect rates should rise to reflect higher funding rates, while in the longer term, the inversion extends to reflect a quicker path to neutral settings.

· We make no changes to our Q1 forecasts of 2y and 10y NZGBs at 4.75% and 4.50%, respectively, but raise our end-2023 forecasts by 25bp for 2y and 10y NZGBs yields to 4.50% and 4.25%, respectively, from 4.25% and 4.00% earlier. We expect NZGBs to outperform ACGBs and USTs.

· Terminal rate pricing should remain capped ~5.5%, with upward repricing likely compensated by expectations of even lower rates by end-2023. We do ...

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