MNI STATE OF PLAY: RBNZ Toughens Up In A Hotter Than Expected Economy

The Reserve Bank of New Zealand marked a significant change toward a tighter policy outlook in ending its quantitative easing programme in the face of an economy running hotter than expected, particularly in the housing market.

The RBNZ's Monetary Policy Committee on Wednesday put a deadline on its Large Scale Asset Purchase (LSAP) program, well short of the original NZD100 billion limit (USD69.9 billion). Around NZD60 billion of bonds were purchased under the program, which will end on July 23.

The central bank has maintained the Official Cash Rate at the record low 0.25%, and is continuing its Fund for Lending program which offers cheap funding to commercial banks.

LEAST REGRETS

In its statement, the RBNZ said that a "least regrets" policy now implied that the level of monetary support since mid-2020 "could be reduced sooner, so as to minimize the risk of not meeting its mandate," a comment which suggests the bank believes the economy is overheating and could overrun its inflation and employment targets.

The key mandates for the bank are for inflation to be within the 1% to 3% target range, and for there to be full employment in the economy.

Inflation is currently at 1.5% but is expected to surge in the second quarter to around 2.7%, the upper range of the RBNZ target. Unemployment is currently at 4.7%.

On inflation, the RBNZ said that it expected pressure to build "due to rising domestic capacity pressures and growing labour shortages."

HOT HOUSE PRICES, RATE HIKES

Regarding the housing market, which continues to climb despite a tightening in lending regulations and a withdrawal of incentives for investors, the bank said the "recent rate of growth in house prices remains unsustainable."

"Any future increases in mortgage rates will further dampen house price growth," the RBNZ statement said.

The bank's last Monetary Policy Statement, released in May, contained a track for the OCR with a 20 basis point rise in September 2022. But Wednesday's statement will only add to speculation of an earlier rate hike, given that rates are now the "preferred tool" for monetary policy.