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New Zealand Monetary Policy May 2021

New Zealand: RBNZ stands pat in May, but hints at first hike in H2 2022

At its meeting on 26 May, the Reserve Bank of New Zealand (RBNZ) decided to hold the official cash rate (OCR) steady at its record low of 0.25%, and at the same time left the scale of its monetary stimulus program unchanged. Economic conditions remain volatile amid Covid-19-related restrictions and the absence of international visitors, although the economy should have regained some steam after it swung back to contraction in the summer months as border closures hit the tourism sector hard. Meanwhile, downside pandemic-related risks to the economic outlook have moderated thanks to progress on the vaccination front globally. Turning to prices, inflation remained below the Bank’s 2.0% midpoint target in Q1, although disruptions to global supply chains, a low base effect and higher oil prices could fuel upside price pressures in Q2.

Looking ahead, the Bank struck a fairly dovish tone, stating that it will “maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level”, and added that considerable time will be needed to meet these goals. That said, the Bank included projections of a hike in the OCR in Q3 2022, pointing to the start of a tightening cycle ahead of when markets had expected.

The next monetary policy meeting is scheduled for 14 July.

Commenting on the release, analysts at ING stated:

“While a broadly unchanged policy statement by the RBNZ overnight might have left some hawkish expectations about tapering talks disappointed, the re-introduction of the OCR projections in the monetary policy statement signalled a clear (and surprising) shift to a hawkish bias. In a move that resembled that by the Bank of Canada in April, the RBNZ signalled a rate hike is expected in the second half of 2022. A lot of conditionality has been added to the new forward guidance, as the recovery path remains highly uncertain, but it is also very likely that housing-related considerations have been made.”

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