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Reserve Bank keeps cash rate at 0.25 percent, halts bond buying

The Reserve Bank (RBNZ) has taken a significant step towards eventual rate rises.

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NZ’s second largest mortgage lender, ASB, made the surprising decision to lift its interest and term deposit rates across the board. Source: 1 NEWS

By RNZ's Gyles Beckford 

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 pre-cursor 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.

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.

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

"Key data that will determine the timing and pace of OCR increases will be: the extent of cost pass-through to inflation; the degree of labour underutilisation; wage inflation, and; inflation expectations."

He said any sign of quickening price and labour pressure could bring forward OCR increases.

"Essentially, every OCR decision from now on should be considered 'live'," Tuffley said.

The next RBNZ monetary statement is in mid-August.

The New Zealand dollar gained more than a quarter of a cent and wholesale interest rates rose after the statement.

File image of $50 and $100 notes. Source: 1 NEWS