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Economy

New Zealand central bank surprises by reducing stimulus

Kiwi dollar jumps after RBNZ halts pandemic bond-buying program

The Reserve Bank of New Zealand announced a halt to its pandemic-induced NZ$100 billion bond purchase program on July 14.   © Reuters

WELLINGTON (Reuters) -- New Zealand's central bank on Wednesday announced a halt to its pandemic-induced NZ$100 billion ($70 billion) bond purchase program, sending the Kiwi dollar soaring as markets took it as sign that a rate hike was not far away.

The Reserve Bank of New Zealand (RBNZ) kept its official cash rate at 0.25%, as widely expected, but local banks brought forward their calls for a rate rise to as early as August, which would put New Zealand at the forefront of countries to raise interest rates.

"The RBNZ has absolutely done enough hand-waving today to tick the 'market-prep' box for an August hike, with CPI and labor market data set to do the rest," said Sharon Zollner, Chief Economist at ANZ Bank.

The move comes after U.S. inflation data rose by the most in 13 years in June, adding to uncertainty about whether such inflationary pressures are transitory and pushing up the U.S. dollar on bets of faster monetary policy tightening.

The New Zealand dollar rose 1.1% after the announcement to $0.7017. Yields on two-year bonds surged 9 basis points to its high for this year at 1.668%.

"The (Monetary Policy) Committee agreed that a 'least regrets' policy now implied that the significant level of monetary support in place since mid-2020 could be reduced sooner, so as to minimize the risk of not meeting its mandate," the RBNZ said in minutes of the meeting.

Members agreed that the major downside risks of deflation and high unemployment had receded.

RBNZ slashed its interest rate to record lows in March last year and pumped billions of dollars in stimulus as the COVID-19 pandemic raged through the country and the globe.

The RBNZ's Large Scale Asset Purchase program had aimed to buy up to NZ$100 billion of NZ Government Bonds, Local Government Funding Agency (LGFA) Bonds and NZ Government Inflation-Indexed Bonds in the secondary market by June 2022.

New Zealand, however, managed to contain the spread of the virus, with the last community case of COVID-19 reported in February, allowing the economy to bounce back faster than most others.

At its meeting in May, the RBNZ hinted at a hike in September 2022.

Governor Adrian Orr has insisted the bank will only consider tightening policy after its inflation and employment targets are sustainably met.

The Reserve Bank of Australia (RBA) said earlier this month that it did not expect a rate rise before 2024.

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