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New Zealand Monetary Policy July 2021

New Zealand: RBNZ ends quantitative easing amid mounting price pressures

At its meeting on 14 July, the Reserve Bank of New Zealand (RBNZ) announced that it will halt bond buying under its large-scale asset purchase program by 23 July, while at the same time it decided to hold the official cash rate steady at its record low of 0.25% and leave the funding for lending program unchanged. The decision to halt bond purchases came against the backdrop of a robust economic recovery and mounting price pressures. Aggregate activity is already above pre-pandemic levels, boosted by sustained consumer spending and building activity, which is translating into capacity pressures for businesses and labor shortages. The Bank therefore expects a spike in inflation in Q2 and Q3, partly fueled by these factors as well as by temporary issues such as high energy prices and transport costs. Moreover, inflationary pressures could stretch over the medium term, although some uncertainty remains as to the actual magnitude of the pass-through effect, given current low wage growth and labor underutilization.

Looking ahead, the Bank stated that “some monetary stimulus remains necessary to best ensure CPI inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level”, but added that stimulus had to be reduced to minimize the risk of not meeting its mandate.

The next monetary policy meeting is scheduled for 18 August.

Commenting on the decision, Francesco Pesole, FX strategist at ING, stated:

“This meeting, in our view, has paved the way for a rate hike in 2021. This is something that the market was already pricing in before the meeting, but expectations were likely centred around a move in Q4. Considering how drastically the RBNZ changed its tone, dropping any reference to a patient approach, markets are now likely expecting an earlier start to the hiking cycle.”

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