NZ interest rates plunge as Brexit gets closer to reality

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

The two-year swap rate dropped 14 basis points to 2.17% and 10-year swaps sank 22 points to 2.64%  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% 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 chairwoman Janet Yellen this week said the world's biggest central bank was watching the outcome of the 'Brexit' vote. Mrs 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' at 52% to 48% with 51 of the 382 local authorities still to declare.

The British pound traded between $US1.3312 and $US1.5015, slumping when it became clearer the vote would be a close run thing. It recently traded at $US1.3418. 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% to 6684.48, Australia's S&P/ASX 200 index falling 3.6% to 5092.8, and Japan's Nikkei 225 index slumping 7.9% to 14962.82. Traditional safe-haven investments including Japan's yen and gold rallied today.

(BusinessDesk)