RBNZ Delivers Hawkish Surprise, Declares To Halt LSAP This Month

The RBNZ took a hawkish turn, as the MPC acknowledged that "economic conditions since late 2020 have been persistently stronger than anticipated" and announced that additional asset purchases under the LSAP programme will be halted by 23 July 2021, while leaving the OCR and FLP parameters unchanged.

• The Reserve Bank took note of strong macroeconomic data, which indicate that "aggregate economic activity is above its pre-COVID-19 level," amid improvement in household spending, construction activity, business investment and economic confidence.
• Policymakers judged that we can expect "spikes in headline CPI inflation over the June and September quarters," owing to one-off or temporary supply-side factors. They acknowledged that "more persistent consumer price inflation pressure is expected to build" on the back of labour market developments, but listed uncertainties around the "pace and magnitude of any pass-through of costs into medium term inflation."
• The MPC observed that the recent pace of house price inflation is unsustainable as "some of the factors supporting house price growth have eased (a repeat from May statement)," while "any future increases in mortgage rates will further dampen house price growth." The latter phrase was a fresh addition and another signal that policy tightening is in sight.
• The main highlight of the statement was the decision to halt asset purchases imminently. There was speculation that the MPC could take this step, but many considered it unlikely that it will be announced at an interim Monetary Policy Review. The RBNZ reiterated that the OCR remains their preferred monetary policy tool.
• The Committee now sees the need for "some ongoing monetary support" rather than "prolonged monetary stimulus." As expected by a number of analysts, the phrasing about "considerable time and patience" needed to achieve policy objectives has been dropped, with policymakers conceding that "the level of monetary stimulus could now be reduced."
• The decision to imminently cease asset purchases opens the path to raising interest rates in the coming months, with an OCR hike in November now fully priced in (as per BBG WIRP tool). Implied odds of a hike in August are virtually 50/50.