Capital Economics’ Joe Maher anticipates a rise in the 10-year Australian government bond yield, projecting it will reach 5 per cent this year before easing in 2027. This forecast is based on the expectation that the Reserve Bank of Australia (RBA) will implement more aggressive interest rate hikes than currently anticipated by investors. In contrast, Maher suggests that New Zealand’s bond yields are less likely to increase, as the Reserve Bank of New Zealand (RBNZ) is expected to temper investors’ expectations for policy tightening this year. Capital Economics is a macroeconomic research company that provides analysis and forecasts on the global economy and financial markets. They offer insights to businesses, investors, and policymakers.
According to Maher, recent communications from the RBNZ, which kept its policy rate on hold this week, appear to have already influenced investors to reduce their expectations for interest rate increases over the coming year. This has contributed to a decline in New Zealand’s 10-year sovereign bond yields. He noted that while yields have fallen in most major developed markets recently, Australian yields have remained relatively stable over the past month.
Maher believes the RBA needs to increase rates further, and that New Zealand’s central bank will follow suit. He argues that the RBA did not tighten policy sufficiently after the pandemic and eased too soon, necessitating another round of rate hikes. Conversely, the RBNZ adopted a more aggressive tightening approach, which Maher suggests was detrimental to the New Zealand economy, followed by significant rate cuts to stimulate recovery. Capital Economics forecasts the Australian 10-year yield will rise to 5 per cent by the end of 2026, then decrease to 4.75 per cent in 2027, as inflation cools and the RBA reduces rates.
Regarding currencies, Maher forecasts the AUD/NZD cross to increase from its current level of 1.18 to 1.21 by the end of 2026, reaching its highest level in over 13 years. He suggests that if the RBNZ only raises interest rates to 3 per cent next year, instead of the 3.5 per cent expected by investors, the 10-year government bond yield in New Zealand is likely to decrease to around 4.25 per cent in 2027.
