NZ interest rates plunge as Brexit gets closer to reality

Friday 24th June 2016

New Zealand swap rates plunged as news of the likely victory for Brexit in the UK's referendum on whether to leave the European Union rippled through global financial markets and sent investors fleeing for safe havens.

The two-year swap rate dropped 14 basis points to 2.17 percent and 10-year swaps sank 22 points to 2.64 percent as investors in all asset classes grapple with the looming outcome of the UK referendum. Investors had been picking the British public to vote in favour of staying, but those expectations have been dashed as early results showed a much closer race with the 'leave' camp pulling away as more of the vote was counted.

"We'll be pricing a sub-2 percent OCR (official cash rate) for sure - this might well be enough to tip the Reserve Bank's hand come August," said Imre Speizer, senior market strategist at Westpac Banking Corp. "We don't know how messy this could get - it's not so much the direct impact on the UK and on the rest of the world, which is pretty small beer, it's the contagion effect if the eurozone starts looking like splintering."

The Reserve Bank held off cutting the OCR at this month's meeting, saying this year's schedule meant a full monetary policy statement was in August and gave policymakers time to wait for data including first quarter gross domestic product and second quarter inflation. The central bank has been grappling with a strong kiwi dollar sapping imported inflation and making life more difficult for exporters, while at the same time a swelling population, housing shortage and low rates have pushed up house prices beyond governor Graeme Wheeler's comfort zone.

Federal Reserve chair Janet Yellen this week said the world's biggest central was watching the outcome of the 'Brexit' vote. Yellen said she didn't "want to overblow the likely impact" of a successful 'leave' vote, but didn't anticipate it would induce a recession in the world's biggest economy.

The Guardian website has the 'leave' camp leading 'remain' 52 percent to 48 percent with 51 of the 382 local authorities still to declare.

The British pound traded between US$1.3312 and US$1.5015, slumping when it became clearer the vote would be a close run thing. It recently traded at US$1.3418. The kiwi jumped against the pound to 52.26 pence, the highest level since October 2013.

Stocks across Asia have also dropped, with New Zealand's S&P/NZX 50 index down 2 percent to 6684.48, Australia's S&P/ASX 200 index falling 3.6 percent to 5092.8, and Japan's Nikkei 225 index slumping 7.9 percent to 14962.82. Traditional safe-haven investments including Japan's yen and gold rallied today.

BusinessDesk.co.nz

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