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Monetary policy impact was major factor for bond market in 2024

In what has turned out to be an eventful year for interest rates, one of the major factors for New Zealand's bond market in 2024 has been the impact of monetary policy. Towards the beginning of 2024, the Reserve Bank of New Zealand (RBNZ) took a significantly hawkish tone at its Monetary Policy Committee meeting in April, when it maintained the Official Cash Rate (OCR) at the elevated level of 5.5%. Although the RBNZ's key message was that near-term price pressures remained and that the OCR would need to stay restrictive for a sustained period, New Zealand's economic data were looking increasingly bleak. Examples of conditions at the time include weak GDP figures and declining retail sales. Given that background, the tone of the RBNZ's Monetary Policy Statement (MPS) in May 2024, in which the central bank took a higher-for longer stance and even suggested that further OCR hikes may be needed, was somewhat surprising. Now that the OCR is down to 4.25% after several cuts that included a 50-basis point reduction in the RBNZ's last meeting of 2024 on 27 November, we expect the RBNZ to continue monetary easing in 2025. In its November MPS, the RBNZ commented that it expects to be able to lower the OCR further “early next year”.

Forthcoming Trump presidency to be key consideration in 2025

Following Donald Trump's victory in the US presidential election on 5 November, the likely impact of his forthcoming presidency as a factor for yields will be a key focus area for bond markets in 2025 and after. Debt investors have several main concerns about the likely impact of Trump's presidency. The first stems from his promises to maintain a broad set of tax cuts that were passed in 2017 during his first administration and to follow them with new reductions, such as a tax exemption for tipped income. Investors are concerned that these moves could lead to even larger fiscal deficits for the US. The market's other concern is Trump's promise to introduce broad-based tariffs, which are thought to carry the risks of a resurgence of domestic inflation along with impacts on growth in the US and in other countries. In our view, these risks may have been tempered somewhat by Trump's recent selection of Scott Bessent as US Secretary of the Treasury. Bessent is viewed as a fiscally conservative choice and is expected to keep a lid on US deficits and deliver a more moderate approach to tariffs. Another factor tempering the risks for us is the possibility that Trump's apparent support for aggressively raising tariffs may be more of a negotiating tool than a cast-iron commitment. In our view, Trump's preference for acting as a dealmaker suggests that he may be looking to leverage the threat of tariffs against trading partners if he sees an imbalance in their relationship with the US. However, it is also true that only time will tell how his second presidential term plays out. In our view, monitoring Trump's plans will be a key consideration for the market in 2025.