New Zealand’s central bank has said it will halt bond buying this month, as the Pacific nation becomes one of the first in the developed world to pull out of a pandemic monetary stimulus.

The surprise move by the Reserve Bank of New Zealand caused the local currency to rise sharply against the US dollar, with economists predicting the bank would raise interest rates as early as August to prevent the economy from overheating.

“Members agreed that the main risks of deflation and high unemployment have diminished,” said Adrian Orr, governor of the bank and head of its monetary policy committee.

“The committee agreed that a policy of ‘least regrets’ now implied that the significant level of monetary support in place since mid-2020 could be reduced earlier, in order to minimize the risk of not fulfilling its mandate.”

The RBNZ left its official rates unchanged at 0.25%.

New Zealand’s economy grew 1.6% in the first quarter as Jacinda Ardern’s government lifted social distancing restrictions thanks to its success in suppressing Covid-19.

House prices are booming, and the RBNZ has predicted “more persistent” consumer price inflation in the coming months due to growing labor shortages and increasing pressures on domestic capacity.

Sharon Zollner, chief economist of ANZ New Zealand, said that the fact that the RBNZ statement was titled “Reduced monetary stimulus” was a general indication that the RBNZ considered the monetary policy cycle to have reversed.

“The RBNZ absolutely waved enough today to tick the ‘market readiness’ box for an August hike, with consumer price inflation and labor market data set to do the rest . ”

The New Zealand dollar rose more than 1% to $ 0.7017 against the US dollar on Wednesday, as investors speculated that New Zealand would become the first developed country to raise interest rates as a result. of the pandemic.

Canada’s central bank began cutting its monthly bond purchases in April, making it the first leading central bank to cut policy stimulus related to the pandemic. Last month, Norway’s central bank said it would likely raise interest rates in September.

Michael Gordon, acting chief economist at Westpac NZ, said the tone of the RBNZ statement was more belligerent than expected and the odds had shifted to a 25 basis point hike in August.

“The RBNZ explicitly ended its bond buying program and described it as removing stimulus measures, rather than letting it calm down as they have done in recent weeks,” he said. he declares.

The RBNZ launched its quantitative easing bond buying program in March 2020 as the coronavirus swept through the developed world, plunging economies into recession. The central bank said on Wednesday it would end its bond buying program by July 23. It was initially scheduled to run until June 2022.

Additional reporting Richard Milne in Oslo

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