The Reserve Bank (RBNZ) is reducing its monetary stimulus by committing to swiftly halting bond purchases via its Large-Scale Asset Purchase (LSAP) programme by July 23.
It is keeping the Official Cash Rate (OCR) at 0.25% and keeping its Funding for Lending Programme (FLP) unchanged - as expected.
The RBNZ's Monetary Policy Committee dropped the phrase it used in its last statement released in May, that “considerable time and patience” would be required for it to meet its inflation and employment targets.
Rather, it said "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".
The New Zealand dollar rose from 69.7US cents to 70.2US cents on the news.
The market didn't expect the RBNZ to halt bond purchases so soon to make way for an OCR hike.
A more hawkish tone
The Monetary Policy Committee said "economic conditions since late 2020 have been persistently stronger than anticipated".
It maintained the view some inflationary pressures are temporary, saying: "The Committee reiterated that there will be near-term spikes in headline CPI inflation over 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."
Changing tack
Coming back to halting bond purchases (using newly "printed" money), the Committee clarified this didn't mean the LSAP was ending. Rather, it "remains an important tool for supporting the efficient functioning of the New Zealand debt market if required, and remains an important monetary policy tool if needed".
The RBNZ has bought around $53 billion of New Zealand Government Bonds via the LSAP to date. When it launched the programme in March 2020, it committed to buying up to $100 billion by June 2022.
ANZ strategist, David Croy, just over a week ago suggested the RBNZ should stop bond-buying to give itself some time before it starts hiking the OCR.
He worried the market might get confused if the RBNZ tried to put downward pressure on interest rates by buying bonds, all the while putting upward pressure on rates by lifting the OCR.
Croy suggested the RBNZ wind back its weekly purchases (forecast to be $200 million this week) by September. The RBNZ has now committed to doing so within the next 10 days.
The RBNZ will keep "printing money" to on-lend to banks at a low rate via its FLP until December 2022.
The RBNZ's monetary policy review saw ANZ and ASB economists bring forward their projections for an OCR hike from November to August. ASB earlier today (before the monetary policy review) announced mortgage and term deposit rate hikes.
The RBNZ, in May, only pencilled in OCR hikes from August 2022.
Here is a copy of the statement:
The Monetary Policy Committee 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 will halt additional asset purchases under the Large Scale Asset Purchase (LSAP) programme by 23 July 2021. The Committee will keep the Official Cash Rate (OCR) at 0.25 percent and the Funding for Lending Programme unchanged.
The global economic outlook continues to improve, providing ongoing price support for New Zealand’s export commodities. Global monetary and fiscal settings remain at accommodative levels supporting the recovery in economic activity. Rising vaccination rates across many countries are providing further economic impetus. However, the need to reinstate COVID-19 containment measures in some regions highlights the ongoing global health and economic risks posed by the virus.
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.
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.
Summary Record of Meeting
The Monetary Policy Committee discussed the economic developments since the May Statement. The Committee noted that global economic growth continued to recover. The positive outlook for economic activity is being supported by rising vaccination rates in many countries, and continued accommodative monetary and fiscal policies supporting household spending. The Committee noted, however, that the need to reinstate COVID-19 containment measures in some regions highlights the ongoing global health and economic risks posed by the virus.
The Committee noted that recent economic data indicate the New Zealand economy remains robust despite 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, and there has been an improvement in business confidence and rising business investment intentions.
The Committee agreed that economic conditions since late 2020 have been persistently stronger than anticipated. Members noted that capacity pressures were now evident, reflecting domestic spending recovering more quickly than production. Domestic incomes are being supported by fiscal and monetary policies, and the ongoing strong terms of trade. Employment growth has remained strong and survey measures of economic confidence have risen from their extreme low levels.
The Committee agreed that, on aggregate and for the time being, domestic spending and export earnings have compensated for the absence of international tourism earnings. While important regional and industry differences remain, the New Zealand economy has recovered strongly since the relaxation of the health-led lockdowns of mid-2020.
The Committee reiterated that there will be near-term spikes in headline CPI inflation over 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 discussed the stance of monetary policy in light of the improving economic activity. Members agreed that the major downside risks of deflation and high unemployment have 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.
As required by their Remit, the Committee assessed the impact of monetary policy on the Government’s objective to support more sustainable house prices. The Committee agreed that the recent rate of growth in house prices remains unsustainable. Members noted that some of the factors supporting the ongoing house price increases have eased. These include a rise in housing supply as construction picks up pace, and more constrained investor demand due to increased loan-to-value restrictions and changes to housing tax policies. The Committee agreed that any future increases in mortgage rates will further dampen house price growth.
The Committee noted staff advice that while the Large Scale Asset Purchase (LSAP) programme has been an effective policy instrument to-date, market conditions and functioning have improved substantially since the programme’s inception. The Committee agreed that further asset purchases under the LSAP programme were no longer necessary for monetary policy purposes and directed staff to halt purchases by 23 July 2021. Members noted that the LSAP programme remains an important tool for supporting the efficient functioning of the New Zealand debt market if required, and remains an important monetary policy tool if needed.
The Committee noted that the Funding for Lending Programme (FLP) would continue to be available to participants. Members agreed this tool provides a useful means of transmitting monetary policy given the pricing moves in line with the prevailing Official Cash Rate (OCR).
Members reiterated their opinion that the OCR is the preferred tool when responding to economic conditions in the future. The Committee agreed that some monetary stimulus remains necessary to best ensure CPI inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. However, the Committee also agreed that the level of monetary stimulus could now be reduced to minimise the risk of not meeting its mandate.
On Wednesday 14 July, the Committee reached a consensus to:
- hold the OCR at 0.25 percent;
- discontinue LSAP purchases by 23 July 2021; and
- maintain the existing Funding for Lending Programme (FLP) conditions.
48 Comments
or did they - apparently this was an unexpected move by the RBNZ and whilst the wording was moderated - the banks are now picking a Aug interest rate move.
https://www.nzherald.co.nz/business/reserve-bank-to-end-money-printing-…
The reduction to monetary stimulus has started. This might have some impact on long term rates. Good but still too timid. At least now there is really nothing left to do before the next move: a series of OCR raises. Note the statement by the RBNZ about the OCR being a primary tool for managing monetary conditions: this is about preparing the markets for the inevitable future raises. Good on ASB for being the first to acknowledge economic reality.
An August move is now on the cards.
Only the ill-informed. RBNZ have been as hawkish as they reasonably could here, making way for OCR hikes in short order should the data continue to support. I'm picking CPI up 3.4% on the year, which will seal the deal for August.
FX markets were suprised (with good follow-through) on the up-side for the Kiwi. Swaps will follow suit.
This is the key comment from RBNZ
The Committee agreed that the recent rate of growth in house prices remains unsustainable. Members noted that some of the factors supporting the ongoing house price increases have eased. These include a rise in housing supply as construction picks up pace, and more constrained investor demand due to increased loan-to-value restrictions and changes to housing tax policies. The Committee agreed that any future increases in mortgage rates will further dampen house price growth.
using unsustainable and then increase in mortgage rates will dampen price growth.
Pretty much confirming the rate hike is coming, but how soon
The RBNZ will keep "printing money" to on-lend to banks at a low rate via its FLP until December 2022.
Banks never lend money, nor does the RBNZ. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a digital record of the money it owes, which we call deposits.
If the OCR were to have risen it should at least have provided a reasonable excuse for anything that occurs. But what happens if it all stops anyway? It seems a market may suddenly decide that purchasing the least affordable housing on the planet is not a wise investment choice. If that occurs prior to the raising of the OCR (for example in the next 6 months), the market may view its decision as fundamentally an indication that the NZ economy is unhealthy. This sentiment could prevent any future recovery from being swift.
cant rely on "what ifs"
Inflation, CPI, GDP, employment and business sentiment all lead to an overheated economy, without even considering house prices having jumped 30% in the last year.
They are right to stop the bond buying programme and are probably going to be a bit slow of the mark for an OCR rise. They now want housing to come off the boil!!! The risks across the board are growing.
Still keeping the funding for lending program in place hmmmmm isnt that a form of printing money. It appears they are still needing to print money because the currency is doomed. Hyper inflation is coming this decade.
They dont tell us about the testing of a government cryptocurrency that the NZRB is working on as we speak. Nearly all Fiat currency countries are working on their own government cryptocurrency because all Fiat currency is doomed.
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