NZ interest rate yield curve turns more steeply positive

New Zealand’s interest rate yield curve turned positive in 2024 and it’s a trend likely to continue into next year, market analysts say.

The yield curve – seen as an indicator of the health, or otherwise, of the economy - turned positive around the middle of the year when the Reserve Bank embarked on its current easing cycle after two years of post-Covid recession.

An upwardly sloping yield curve reflects low short-term interest rates, which normally stimulates growth.

Growth is usually accompanied by inflation, to the point where investors demand more reward for locking their money up over the longer term, which drives longer rates higher.

A positive curve indicates better times ahead, while the opposite is true of a negative sloping curve.

As of Friday, there was a 36 basis point positive difference between the two-year swap rate of 3.7% and the 10-year swap rate of 4.06%.

In May 2023, the curve was negative to the tune of 104 basis points.

By June this year, the gap had narrowed to a negative 46 basis points before swinging into positive territory in July.

On Wednesday, the Reserve Bank cut its Official Cash Rate by half a percentage point to 4.25%.

The rate has dropped 1.25 percentage points since July.

“There is growing confidence about what they [the Reserve Bank] have delivered to date, and what they intend to deliver next year, will be something that delivers a better economic environment next year and beyond,” Harbour Asset Management fixed income and currency strategist Hamish Pepper said.

“The Reserve Bank’s expectation of 6.8% growth in house prices next year was a good example of the idea that we have probably seen the worst from an activity point of view, and that lower interest rates will help the situation going forward.

“They have front-loaded this easing cycle, and they expect it to bring beneficial impacts for the economy.”

Pepper said there were risks to the outlook, particularly if there is an international trade war under US President-elect Donald Trump, which would not be good for global growth.

Kiwibank chief economist Jarrod Kerr. Photo / Supplied

“There are still uncertainties around the outlook,” Pepper said, adding it was not a “slam dunk” that the Reserve Bank would cut again in February by another 50 basis points.

“Also, it’s not a slam dunk that a recovery will take place in the way that the Reserve Bank expects.”

Kiwibank chief economist Jarrod Kerr said the Reserve Bank, at Wednesday’s release, was not as “dovish” as some had thought, with a flatter-than-expected future track down to 3%.

“That was a bit disappointing and I think they will be proven wrong on that, but we have seen some massive moves in the interest rate markets in recent months, which is good, but there is still this idea that the Reserve Bank may not cut by as much.”

He said part of the push higher in long-term rates was a reflection of international trends, which had seen US Treasury yields gain on the back of Trump’s win earlier in November.

While low short-term rates were a good sign, Kerr said they also reflected the current dire state of the economy.

“I think things will be better next year and that won’t be hard coming off the weak year that we have just had.

“It’s going to be patchy, and it’s not going to be perfect, but we are going to see a lot more growth next year, and a lot more growth in 2026 as the economy rebalances.

“The big shift is that businesses are telling me that their costs are coming down, their interest rates are going down, and that their profitability is looking better going into next year,” Kerr said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.