RBNZ Says ‘Prolonged’ Monetary Stimulus Remains Necessary

New Zealand’s central bank signaled it is in no rush to remove monetary stimulus, saying inflation will slow next year and the economic outlook remains highly uncertain amid the Covid-19 pandemic.

“Prolonged monetary stimulus” remains necessary and “considerable time and patience” will be required to meet its inflation and employment targets, the Reserve Bank said in a statement Wednesday in Wellington. The bank kept the official cash rate at 0.25% and left its Large Scale Asset Purchase program unchanged at NZ$100 billion ($73 billion), but said it “remains prepared to provide additional monetary stimulus if necessary.”

Central banks around the world are pushing back against investor bets that signs of emerging inflation will lead to the removal of stimulus. Federal Reserve Chairman Jerome Powell signaled he is nowhere close to removing support for the U.S. economy, while earlier this month the Reserve Bank of Australia pledged to hold interest rates at a record low until 2024.

The RBNZ’s statement today is “an attempt to hose down some of the exuberance that has gripped global financial markets as vaccine rollouts brought optimism that the pandemic will soon be put behind us,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “We continue to expect the RBNZ will gingerly start lifting the OCR from August 2022. That is 18 months away, which is an eternity in a time of heightened uncertainty.”

The New Zealand dollar rose after the statement to post fresh three-year highs. It bought 73.70 U.S. cents at 4:14 p.m. in Wellington, up from 73.49 cents beforehand.

New Zealand’s economy has enjoyed a V-shaped recovery from its pandemic-induced recession and the housing market is booming, turning attention to when the RBNZ might begin to remove stimulus. The jobless rate unexpectedly fell to 4.9% in the fourth quarter and the central bank today forecast that inflation will accelerate to 2.5% by June, exceeding the midpoint of its target range.

RBNZ Says ‘Prolonged’ Monetary Stimulus Remains Necessary

Some bank economists are tipping the RBNZ will explicitly start to reduce its bond buying later this year, with a minority already projecting rate rises from as early as the second quarter of 2022.

However, the RBNZ refrained from publishing a forward track for the cash rate beyond the current quarter and predicted inflation will slow to 1.4% next year.

In its record of meeting, the Monetary Policy Committee said it would “look through” temporary factors driving prices.

“The Committee agreed that, in line with its least regrets framework, it would not change the stance of monetary policy until it had confidence that it is sustainably achieving the consumer price inflation and employment objectives.”

The RBNZ “wants to see the whites of the eyes of inflation and employment before it shifts monetary policy,” said Dominick Stephens, chief New Zealand economist at Westpac in Auckland. “After today’s statement, we remain comfortable forecasting no change in the OCR until 2024.”

Negative Rates?

The RBNZ said current monetary policy settings are “appropriate to achieve its inflation and employment remit,” but noted that operational work to enable the cash rate to be taken negative if required was now complete.

Orr told a news conference that the RBNZ wants to retain all options. If monetary conditions tightened too much via rising bond yields or the exchange rate, then the cash rate “can go lower,” he said.

The nation’s border is expected to remain closed to foreigners throughout 2021, decimating the key tourism industry, and New Zealand won’t start mass immunization against the virus until the second half. Health officials are currently dealing with a small community outbreak in largest city Auckland that has infected 11 people.

The RBNZ’s new forecasts reflect the better-than-expected economic performance of recent months. Annual growth is estimated to be 1.2% in the 12 months through March 2021 compared with a contraction of 0.9% projected in November. However, growth is only forecast to improve to 1.4% the following year.

“Although the economic recovery has been much stronger than anticipated at the outset of the pandemic, the outlook remains highly uncertain and contingent upon the path of the virus,” the RBNZ said.

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