14 Jul 2021

Cash rate kept at 0.25 percent, but Reserve Bank changes tack

5:20 pm on 14 July 2021

The Reserve Bank (RBNZ) has cleared the way for interest rate rises from next month.

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Photo: RNZ / Samuel Rillstone

It held the official cash rate (OCR) at a record low 0.25 percent, and said 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 Monetary Policy Committee (MPC) agreed to reduce the current stimulatory level of monetary settings in order to meet its consumer price and employment objectives over the medium-term."

"Stimulus could now be reduced to minimise the risk of not meeting its mandate."

The RBNZ is required to get inflation at 2 percent, and maximise sustainable employment.

In its latest monetary policy review it said 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.

The MPC said inflation is expected to spike over the next few months, but maintained much of it was likely to dissipate, and it was still short of meeting its primary goals of sustainable employment and inflation about 2 percent.

The bond-buying programme was brought in last March 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 $56bn to the end of May.

It maintained the $28bn funding-for-lending programme (FLP) which offers banks cash at 0.25 percent for lending to customers.

Economists were quick to bring forward expectations when the RBNZ would start raising rates.

ASB chief economist Nick Tuffley said the RBNZ had clearly changed tack.

"It's a fine line but we now expect the RBNZ will lift the OCR in August - provided key data between now and then are sufficiently strong to support the need for earlier removal of stimulus."

He said that would include inflation and labour market numbers which are due in the next few weeks and before the RBNZ's August meeting, and would show the strength of cost and wage pressures, and how much slack there was in the labour market.

Tuffley expected another OCR rise in November and then a gradual rise to around 1.5 percent through next year.

ANZ chief economist Sharon Zollner also picked a rise in August: "The normalisation process has already kicked off - with the logical next step being OCR hikes."

The New Zealand dollar gained close to half a cent against the US dollar, and wholesale interest rates also rose after the statement.

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