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Kiwi central bank to halt bond purchases next week

By Debabrata Das

03:55, 14 July 2021

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The Reserve Bank of New Zealand (RBNZ) will reduce its economic stimulus programme by stopping bond purchases by 23 July.

The central bank’s Monetary Policy Committee (MPC) has agreed to “reduce the stimulatory level of monetary settings” to “meet its consumer price and employment objectives over the medium-term”, as it looks to cool down the domestic economy. 

The RBNZ had been buying government bonds under its Large Scale Asset Purchase (LSAP) programme, which helped keep wholesale interest rates low. Meanwhile, it left the official cash rate unchanged at 0.25%.

Economic activity up

Recent data indicate the New Zealand economy remains robust despite the ongoing impact from international border restrictions. Aggregate economic activity is above its pre-COVID-19 level. Household spending and construction activity are at high levels and continue to grow,” an official RBNZ statement said.

The central bank’s MPC expects “near-term spikes” in consumer price inflation in the second and third quarters of 2021. While these are expected to be because of “one-off issues”, the MPC members agreed that in the absence of further economic shocks, consumer price inflation pressure will build over time.

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The tone of the RBNZ statement caught economists by surprise, as it becomes one of the first major central banks to taper stimulus after the COVID-19 pandemic.

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“Hawkish tone”

“The tone of today’s statement was more hawkish than we expected from the RBNZ at this point. The surprise for us was that the RBNZ explicitly drew a close to its bond purchase programme, and described this as a removal of policy stimulus, rather than letting it quietly wind down as they have done over recent weeks,” Michael Gordon, acting chief economist for New Zealand at Westpac, wrote in a note.

“The RBNZ today sent a hawkish signal by announcing the end of its bond purchases. While we currently expect the central bank to start hiking rates in May next year, the risk is that it will happen earlier,” wrote Marcel Thieliant, senior Japan, Australia and New Zealand economist at Capital Economics.

Kiwi rises

Soon after the announcement the Kiwi dollar gained versus the greenback. At 04:45 BST (UTC +1), the NZD was trading 0.98% higher than the previous close at 70.14 US cents.

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Read more: Retail card spending and house prices continue to rise in New Zealand

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