New Zealand Central Bank to Reduce Stimulus by Halting Bond Purchases

New Zealand’s central bank said it will reduce stimulus for the economy as inflation pressures rise and growth rebounds from the pandemic.

The Reserve Bank of New Zealand said Wednesday that it will halt its purchases of New Zealand government bonds–which had helped to keep wholesale interest rates low–by July 23.

Its cash rate was left unchanged at a record low of 0.25% and a funding-for-lending program for banks was also left in place.
The central bank’s monetary policy committee said that the risks of deflation and high unemployment stemming from the pandemic have now receded.

The committee agreed that “the significant level of monetary support in place since mid-2020 could be reduced sooner,” it said.
Interest-rate markets have factored in an RBNZ rate increase in November, which would put it well ahead of Australia and the U.S. in raising rates. Economists at the country’s main banks also think November is when the central bank will begin a series of rates increases, because of rising inflation.

The central bank, at its previous full policy statement in May, indicated that it could start raising its cash rate from the July-September quarter of next year. Its announcement on Wednesday wasn’t a full policy statement, so it didn’t have specific forecasts for the economy and interest rates.

The RBNZ said that expected spikes in inflation this year would reflect one-off factors, but more persistent inflation pressures could build because of labor shortages and capacity constraints.

New Zealand’s economy has bounced back from the coronavirus pandemic, helped by increased government spending that is forecast to more than double debt, stimulatory monetary policy and strict health and border measures that have so far ensured few Covid-19 infections or deaths.

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