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Bloomberg
New Zealand’s central bank (RBNZ) said it will reduce monetary stimulus by ceasing quantitative easing, a surprise move that sent the currency higher as traders priced in an interest-rate increase as early as August.
The Reserve Bank’s Monetary Policy Committee, led by Governor Adrian Orr, on Wednesday held the official cash rate at 0.25%, but said it will halt bond buying under its Large Scale Asset Purchase program by July 23. The statement omitted a previous reference to the need for considerable time and patience to achieve its inflation and employment goals.
“Members agreed the major downside risks of deflation and high unemployment have receded,†the RBNZ said. “The committee agreed that a ‘least regrets’ policy now implied that the significant level of monetary support in place since mid-2020 could be reduced sooner.â€
New Zealand is in the vanguard of developed-world central banks that are beginning to normalise policy. Canada is expected to keep scaling back stimulus and South Korea will provide guidance on its plans at Thursday’s meeting. Signs are emerging that New Zealand’s economy may be overheating, pushing inflation towards the top of the RBNZ’s target range.
Investors are now fully pricing in a rate hike in November, up from an 82% chance before the statement, and there’s now a 76% probability of a move in August. New Zealand’s dollar rises to 70.16 US cents in Wellington, from 69.64 cents before the release.
Two-year swap rates jumped to 0.96%, the highest since February 2020.
“The risk of inflation and employment undershooting their objectives has switched to the risk of overshooting should the current level of stimulus remain in place,†Nick Tuffley, chief economist at ASB Bank in Auckland.
He now expects the RBNZ to start raising rates in August rather than November. ANZ Bank also changed its call and is forecasting an August increase.