Business Editor at Large Liam Dann explains inflation, and what it means for you and your money.
Video / Cameron Pitney
The Reserve Bank has kept the official cash rate on hold but says it will reduce economic stimulus by winding up its programme of bond buying - sometimes described as printing money.
The Monetary Policy Committee agreed to reduce the current stimulatory level of monetary settings in order to meet its consumer price and employment objectives over the medium-term, the RBNZ said today in a statement.
"The Reserve Bank will halt additional asset purchases under the Large Scale Asset Purchase (LSAP) programme by 23 July 2021," it said.
The move was more aggressive than the market expected and the New Zealand dollar spiked on the news.
"The RBNZ has clearly changed tack," said ASB chief economist Nick Tuffley.
"The risk of inflation and employment undershooting their objectives has switched to the risk of overshooting should the current level of stimulus remain in place".
The Committee will leave the Official Cash Rate (OCR) at 0.25 per cent and the Funding for Lending Programme unchanged.
Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Both ASB and ANZ economists are now forecasting the offical cash rate will rise from August.
"The global economic outlook continues to improve, providing ongoing price support for New Zealand's export commodities," the RBNZ said.
"Global monetary and fiscal settings remain at accommodative levels supporting the recovery in economic activity.
"Rising vaccination rates across many countries are providing further economic impetus.
"However, the need to reinstate Covid-19 containment measures in some regions highlights the ongoing global health and economic risks posed by the virus".
The Kiwi rallied to US70c from US69.70c on the back of the news.
The decision to stop the large scale asset purchase programme (LSAP) came as a big surprise to the market.
"Most people thought that they would reduce it over the rest of the year, or over the next couple of months," Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said.
"It brings into play the Reserve Bank's meeting in August as the time when they could potentially raise rates," he said.
"It speaks to the confidence that the monetary policy committee has about the state of the economy and the outlook," he said.
Last week's stronger-than-expected Quarterly Survey of Business Opinion (QSBO) has prompted the big four commercial banks to bring forward their rate hike expectations from early 2022 to November this year.
