New Zealand central bank reduced its current monetary stimulus as the major downside risks of deflation and high unemployment receded amid improving economic activity.

The Monetary Policy Committee of the Reserve Bank of New Zealand, on Wednesday, decided to halt additional asset purchases under the Large Scale Asset Purchase programme by July 23.

The committee decided to hold the official interest rate at 0.25 percent and the Funding for Lending Programme unchanged.

The Committee agreed that a ‘least regrets’ policy now implied that the significant level of monetary support in place since mid-2020 could be reduced sooner, so as to minimize the risk of not meeting its mandate.

Policymakers observed that the economy remains robust despite the ongoing impact from international border restrictions. Aggregate economic activity is above its pre-COVID-19 level.

The MPC expects near-term spikes in headline CPI inflation in the June and September quarters either due to one-off factors such as high oil prices, or of temporary in duration, such as supply shortfalls and higher transport costs.

In the absence of any further significant economic shocks, more persistent consumer price inflation pressure is expected to build over time due to rising domestic capacity pressures and growing labor shortages.

The MPC noted that medium-term inflation and employment would likely remain below its remit objectives in the absence of some ongoing monetary support. However, the committee agreed that the level of monetary stimulus could now be reduced to minimize the risk of not meeting its mandate.

The end of asset purchases signals that interest rates will rise soon, Marcel Thieliant, an economist at Capital Economics, said.

Ahead of today’s meeting, markets were pricing a quarter point rate hike by the end of this year. The economist reiterated that the RBNZ will lift rates to 1.25 percent by 2023.

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