RBNZ Sees Need for Prolonged Stimulus Amid Uncertainty

New Zealand’s central bank signaled it is in no rush to remove monetary stimulus, saying the outlook remains uncertain as the economy gradually recovers from the Covid-19 pandemic.

The Reserve Bank’s monetary policy committee on Wednesday maintained its current stimulatory settings, holding the official cash rate at 0.25% and the Large Scale Asset Purchase program at NZ$100 billion ($71 billion). It reiterated it is prepared to lower the cash rate further if required.

“The committee agreed that, in line with its least regrets framework, it would not remove monetary stimulus until it had confidence that it is sustainably achieving the consumer price inflation and employment objectives,” the bank said. “Given that uncertainty remains elevated, gaining this confidence is expected to take considerable time and patience.”

Policy makers are assessing whether an expected pick-up in inflation this year will be sustained, and whether the labor market’s gradual recovery will be hurt by the possibility of a double-dip recession. At the same time, the government now requires the RBNZ to consider the impact of its decisions on New Zealand’s housing market, where soaring prices are raising concerns about widening social inequalities.

RBNZ Sees Need for Prolonged Stimulus Amid Uncertainty

“The New Zealand economy is evolving broadly in line with RBNZ expectations, and there’s time to see how more recent developments impact things,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “The RBNZ is under no pressure to make any bold calls about how precisely things will turn out.”

The New Zealand dollar rose after the statement. It bought 70.88 U.S. cents at 3:21 p.m. in Wellington, up from 70.60 cents beforehand.

The RBNZ said the outlook for growth remains similar to the scenario it presented in its last statement in February. It said inflation is likely to exceed its 2% target “for a period” but this is likely to be temporary.

“This outlook remains highly uncertain, determined in large part by both health-related restrictions, and business and consumer confidence,” it said. “The committee agreed that medium-term inflation and employment would likely remain below its remit targets in the absence of prolonged monetary stimulus.”

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 fell to 4.9% in the fourth quarter and the central bank in February forecast that inflation will accelerate to 2.5% by June, exceeding the midpoint of its target range.

Double-Dip Recession?

Still, the economy unexpectedly contracted 1% in the final three months of 2020 and economists see little or no growth in the three months through March, raising the prospect of a double-dip recession.

Some analysts are tipping the RBNZ will explicitly start to reduce its bond buying later this year, with a minority already projecting rate rises in 2022. But others see the central bank on hold for a prolonged period after the government in March announced a raft of measures to cool the rampant housing market, including tax adjustments to curb investor demand.

The RBNZ said the extent of the dampening effect of the government’s new housing policies on house prices, and hence inflation and employment, will “take time to be observed.”

New Zealand will start to allow travelers from Australia to enter the country without undergoing quarantine from April 19, which may deliver some relief for a decimated tourism industry. But the border is expected to remain closed to all other foreigners throughout 2021, and the country won’t start mass immunization until the second half.

“The planned trans-Tasman travel arrangements should support incomes and employment in the tourism sector both in New Zealand and Australia,” the RBNZ said. “However, the net impact on overall domestic spending will be determined by the two-way nature of this travel.”

In late February, the government instructed the RBNZ to consider the impact on housing when it makes monetary and financial policy decisions. Specifically, the monetary policy committee will to need to explain regularly how it has sought to assess the impacts of its decision on housing outcomes, Finance Minister Grant Robertson said at the time.

“The committee’s initial assessment is that stimulatory monetary policy is playing a role in lifting house prices,” the bank said today. “Other factors are also influencing house prices including: the impact of low global interest rates on all asset prices, constrained housing supply and infrastructure, land use regulations, tax policies and the broader recovery in aggregate demand.”

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