RBNZ Delivered More Than What Is Being Expected

#OPINIONLEADER# #Signal#

ByJin Dao Tai

 JUL 21, 2021

End of LSAP programme.

The Reserve Bank of New Zealand (RBNZ) surprised the market when they announced the ending of its Large Scale Asset Purchase (LSAP) programme last Wednesday during their monetary policy meeting. The central bank’s decision comes amid the robust recovery of the New Zealand economy indicated by recent releases of economic data. It was also highlighted that economic activities have recovered above the pre-COVID-19 level. Although it was clear that the New Zealand economy has been recovering well and that their virus containment effort has yield good results, the market was only expecting the central bank to carry out a tapering on their LSAP programme instead of putting a complete halt to it.

The RBNZ’s committee acknowledged the efficacy of the LSAP programme, highlighting that tremendous progress have been made in market conditions and functioning. Thus, the programme is no longer necessary for monetary policy purposes and the decision to halt it by 23 July was made.

What’s next for the RBNZ?

During the May meeting, the RBNZ projected that their first interest rate hike will take place in September 2022. Together with the halting of the LSAP programme, the next question to ponder on is whether the central bank will bring forward its rate hike. With the highly hawkish tone that the RBNZ has been sending out in recent meetings, the market has started pricing in rate hikes to take place in 2021, even as early as the next monetary policy meeting in August.

Given the optimistic outlook on the recovery of the New Zealand economy, it is justifiable for the RBNZ to hike interest rate at an earlier timeline. Moreover, the central bank also highlighted that recent rise in home prices remains unsustainable although some factors such as the rise in housing supply and changes to housing tax policies have eased the spike in prices. A hike in interest rates will also lead to an increase in mortgage loan rate, making home sales less attractive. The central bank’s committee also mentioned that any increases in mortgage rates will provide more downward pressure on home prices.

The RBNZ will be releasing its quarterly economic projections during their next meeting in August. This will provide the central bank with a clearer view on whether a rate hike in August is the next step. Despite the likelihood of more hawkish moves to be undertaken in the near future by the RBNZ, its committee said that the LSAP programme remains crucial in supporting the functioning of the New Zealand debt market and will adopt the use of it once more if necessary.

Short-lived bullish run.

The RBNZ’s decision to end quantitative easing (QE) led to the strengthening of the New Zealand dollar across the board as it took the market by surprise. However, the bullish run was short-lived due to the concern that a rebound in the number of COVID cases will impact global economic recovery. Over the weekend, there has been a resumption of COVID restrictions across Asia due to an increase in cases triggered by the Delta variant. As a result, high beta currencies like the New Zealand dollar weakened against safe haven currencies such as the U.S. dollar and the Japanese yen.