NZ central bank may cease QE bond purchases in coming months

Wellington

NEW Zealand's central bank (RBNZ) may end its quantitative easing bond purchases in coming months as it prepares to raise interest rates, according to the Bank of New Zealand.

Financial markets are now pricing a better than 50 per cent chance that the Reserve Bank will increase its official cash rate (OCR) in November, BNZ strategist Nick Smyth wrote in a note to clients on Monday in Wellington. At the same time, the RBNZ kept the pace of its QE purchases unchanged at NZ$200 million (S$190 million) this week despite the government stepping up nominal bond issuance to NZ$500 million from NZ$300 million, meaning the market will need to start absorbing more supply, he said.

"The market reaction may provide some clues as to how the market will adjust when the RBNZ stops purchases altogether," he said. "Taking market pricing at face value (a greater than even chance of an OCR hike in November), the implication would be that the RBNZ might stop QE purchases in the coming months, since the RBNZ would want to stop adding to its stock of bond holdings before it starts raising the OCR."

The RBNZ last month forecast it will start raising rates in the second half of 2022. Since then, strong economic growth data and signs of brewing inflation pressures have prompted investors to bring forward expectations for monetary tightening.

A quarter-point OCR hike is almost fully priced in for February next year, while the chance of a move in November this year is seen at 56 per cent, swaps data show. BLOOMBERG