Wellington, July 14, 2021
The Reserve Bank of New Zealand (RBNZ) has taken a significant step towards eventual rate rises. Holding the Official Cash Rate (OCR) at a record low of 0.25%, it will keep the cheap money lending scheme for banks.
But it has called a halt to its Bond Buying Programme (LSAP), a necessary precursor to raising the OCR.
The Bank said in a statement that its Monetary Policy Committee (MPC) agreed to reduce the current stimulatory level of monetary settings to meet its consumer price and employment objectives over the medium term.
Strong but uncertain economy
“Stimulus could now be reduced to minimise the risk of not meeting its mandate.”
The RBNZ is required to get inflation at 2% and maximise sustainable employment.
In its latest Monetary Policy Review, it said that the economy has been performing strongly, but still faced uncertainties.
“Household spending and construction activity are at high levels and continue to grow. Business investment is now responding to capacity pressures and labour shortages, and measures of economic confidence continue to improve. The need to reinstate Covid-19 containment measures in some regions highlights the ongoing global health and economic risks posed by the virus,” it said.
Inflation may spike
The MPC said that inflation is expected to spike over the next few months but said that much of it is likely to dissipate. It is still short of meeting its primary goals of sustainable employment and inflation about 2%.
The Bond-Buying Programme was launched in March 2020 to keep interest rates low and ensure liquidity in the economy. It had a limit of $100 billion and was due to expire in the middle of next year. The RBNZ had bought more than $56 billion until the end of May 2021.
It maintained the $28 billion funding-for-lending programme (FLP) which offers banks cash at 0.25% for lending to customers.
In the May monetary statement, the RBNZ signalled rate rises in the second half of next year. Financial markets have put a better than evens chance of a rate rise in November and made a February rise a near certainty.
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