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The Reserve Bank of New Zealand will taper its quantitative easing programme this year as house prices hit record levels, its former assistant governor and chief economist told MNI, adding that the economic recovery means zero or negative official interest rates are now highly unlikely.

John McDermott, at the RBNZ for a decade until 2018 before moving to think tank MOTU, said the economy's recent performance has been "stunning, given where we were at," and that it had been buoyed not only by the central bank but also by a strong health and fiscal response to the Covid-19 emergency from Labour Prime Minister Jacinda Ardern's government.

"The economy is actually marginally bigger now than it was at the beginning of the pandemic, and that has happened without international tourism, which is a major economic factor," McDermott said.

"The economic recovery has all come from the health response, and that has created a lot of confidence for this year."

OVERHEATED HOUSING

Commodity exports have held up well, said McDermott, and a new trade deal with China – along with a deal with Britain expected this year – would be positive in the medium term.

The RBNZ cut official rates to a record low 0.25% last year, and told commercial banks to ready for zero or even negative interest rates. It also committed to purchasing up to NZD100 billion of government bonds, local government funding agency bonds and government inflation-indexed bonds in the secondary market by June 2022.

QE has stoked record house prices, said McDermott, who now expects the RBNZ to taper.

"In a small economy like NZ, QE goes straight to housing prices because it doesn't have many other places to go," he said, adding that while the rising cost of housing posed no financial stability risks it could worsen inequality.

Data released last week showed annual inflation at a higher-than-expected 1.4% in the December quarter, unchanged from the previous period.