New Zealand may be the first advanced economy to hike interest rates. The Reserve Bank of New Zealand (RBNZ) abruptly announced a halt to the Large Scale Asset Purchase (LSAP) program. Along with the announcement was the release of the Monetary Policy Committee notes. The Committee said the risk of deflation has now passed, and the economy needs less stimulus. They also expressed concerns over soaring household debt and unsustainable home price growth.
New Zealand Abruptly Ends QE Program Nearly A Year Early
The country’s central bank announced they would be tapering the LSAP program, a form of quantitative ease (QE). It officially comes to an end in just a few days, on July 23. The NZ$100 billion (US$70 billion) program wasn’t expected to end until June 2022. The abrupt cancellation is almost a year earlier than the market had expected.
The LSAP program is similar to the Bank of Canada (BoC) QE program. A central bank buys bonds with the goal of driving yields lower. It results in investors looking for higher returns in riskier assets, to compete with inflation. You kno, like speculating on housing.
New Zealand Thinks Inflation Might Be Transitory, But Won’t Risk Being Wrong
When the QE program was launched, the country was trying to curb deflation pressure. A little over a year later, and they’re looking to stop inflation pressure. “Members agreed that major downside risks of deflation and high unemployment have receded,” said the central bank’s meeting minutes.
Most central banks consider inflation to be a transitory issue, and likely too cool soon. The RBNZ doesn’t appear to be keen on waiting to find out if that’s true. By stopping QE, they’ve set the groundwork for a rate hike when needed. Experts see that happening as early as November. That would make New Zealand the first advanced economy to hike rates. By a large margin as well.
New Zealand House Price Growth Is “Unsustainable”
New Zealand’s housing may have played a part in the decision for monetary tightening. Earlier this year, the RBNZ received a mandate to consider home prices in its decisions. The Committee minutes make reference to this, as they call home price growth “unsustainable.”
Committee members note there are cooling factors on the horizon though. Home supplies are primed to surge, as construction takes off. Additionally, investor demand for property cooled, attributed to a rise in loan-to-value rules.
Housing tax policies are also seen to be a factor that will eventually work to cool the market. Though all committee members agree, higher mortgage rates will do the trick.
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