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A change in the Reserve Bank's tone has caused a "steep" move in wholesale markets, Kiwibank's economists say, and the fall is likely to continue.
The bank cut the official cash rate by 25 basis points, as expected, last week. But news two members of its monetary policy committee had voted to cut the rate by 50bps, and the bank had revised down its future track for interest rates, was a surprise.
Jarrod Kerr, chief economist at Kiwibank, said the two-year swap rate dropped 16bps in response, to 2.94 percent and opened on Monday at 2.9 percent.
"This is good news for indebted businesses and homeowning households. An eventual drop in the cash rate to 2.5 percent should see the two-year swap rate on a glide-path to 2.8 percent, taking retail rates lower with it."
He said banks had already passed on some of the drop to borrowers but there could be more to come, particularly if the Reserve Bank cut the rate another two times before Christmas.
"Markets don't have that 100 percent priced in so we could see rates fall a bit further."
Kerr said the Reserve Bank had been told how markets would react to its update.
"The Reserve Bank knew what it was doing, it knew what the reaction would be and it got it."
ASB senior economist Mark Smith also expected interest rates to drop.
"NZ short-term swap yields are at three-year lows and could push lower as rate cut odds firm.
"We expect near-term rate cut odds to firm but remain less than fully priced for 25bp cuts. Forthcoming partial data for NZ Q2 GDP over the coming weeks will be key for perusing to see if it is consistent with the 0.3 percent Q2 contraction expected in the August MPS. Soft July hiring data is expected."
He said the Reserve Bank's proposal to relax bank capital requirements could mean more lending.
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