Thumbs up from the currency markets yesterday to the news that the Reserve Bank of NZ is turning off one of its major stimulus taps next week.
The New Zealand dollar jumped more than half a US cent, breaking through 0.70c within minutes of the announcement yesterday and remained above that level for the rest of the day.
The catalyst was the Reserve Bank’s monetary policy committee decision to end its quantitative easing program totalling $NZ100 billion.
The bank said decision was taken because economic conditions since late last year had been “persistently stronger than anticipated” and the risk of deflation and high unemployment had receded.
“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, so as to minimise the risk of not meeting its mandate,” it said.
The decision made the RBNZ the first major central bank around the globe to haul back on the stimulus lever.
At its last meeting in May, the RBNZ left the impression that it saw a rate rise possible in September 2022.
But for the time being the bank left its stimulus policy settings in place.
In a statement after the latest meeting on Wednesday, that ‘steady as she goes’ approach changed dramatically and out went the bank’s bond buying campaign, effective in 9 days’ time – no slow tapering for the Kiwis.
Driving the decision was growing concerns about rising inflation.
The post meeting statement yesterday revealed it had “agreed to reduce the current stimulatory level of monetary settings in order to meet its consumer price and employment objectives over the medium-term.”
The Reserve Bank said it will end additional asset purchases under the $NZ100 billion Large Scale Asset Purchase (LSAP) program by July 23 (Friday week).
The bank said it will keep the Official Cash Rate (OCR) at 0.25% while its Funding for Lending Programme remains unchanged.
The move is more dramatic than the action announced earlier this month by the Reserve Bank of Australia.
The RBA said it was trimming its bond buying by 20% or $A1 billion to $A4 billion a week after the current $A5 billion a week program ends in September. Purchases at the lower amount will continue until at least November.
But the RBNZ is keeping its funding program for banks intact while the RBA ended its term Funding facility at June 30 with $A188 billion of the $A200 billion drawn down (and lent at the cash rate for three years).
The statement from the RBNZ indicates that it is not as sanguine about the transitory nature of rising inflation (as the RBA and the US Federal Reserve are) and wants to start cooling the pace of activity and demand in the NZ economy.
“The Committee reiterated that there will be near-term spikes in headline CPI inflation in the June and September quarters. These reflect factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs.
“The Committee agreed that, in the absence of any further significant economic shocks, more persistent consumer price inflation pressure is expected to build over time due to rising domestic capacity pressures and growing labour shortages.
“However, the Committee noted that uncertainties remain as to the pace and magnitude of any pass-through of costs onto medium term inflation, especially given reported underutilisation of labour, modest wage growth, and well anchored inflation expectations.
“The Committee noted that medium-term inflation and employment would likely remain below its Remit objectives in the absence of some ongoing monetary support.
“However, the Committee agreed that the level of monetary stimulus could now be reduced to minimise the risk of not meeting its mandate,“ the RBNZ statement said.
Friday sees the June quarter Consumer price Index for New Zealand released. First quarter core CPI rose at an annual rate of 1.5%. Forecasts suggest the rate will be above 2% for the June quarter thanks to higher oil and petrol prices.
Looking at the NZ economy, the bank said “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. Business investment is now responding to capacity pressures and labour shortages, and measures of economic confidence continue to improve.”
