The Official Cash Rate is unchanged at 0.25 percent, the Reserve Bank confirms.
In a monetary policy review on Wednesday, the central bank confirmed it is however, reducing the level of its current policy settings. From July 23, it will stop buying bonds under the Large Scale Asset Purchase (LSAP) programme, introduced in March 2020.
Effectively injecting cash into the economy to help reduce business and household borrowing costs, the programme has been nicknamed 'money printing'.
The Funding for Lending programme, a low-cost source of funding available to banks, will remain unchanged.
The Official Cash Rate is still at a record low 0.25 percent. But the Reserve Bank acknowledges the economy continues to perform better than expected coming through COVID-19.
"Aggregate economic activity is above its pre-COVID-19 level. Household spending and construction activity are at high levels and continue to grow," the statement said.
It expects inflation to rise in the June and September quarters.
"These reflect factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs," the Reserve Bank said.
Barring any further economic shocks, it expects inflation pressures to "build over time". But in the short-term, there's still uncertainty around how fast and strong the rise will be.
"The Committee noted that uncertainties remain as to the pace and magnitude of any pass-through of costs onto medium term inflation, especially given reported underutilisation of labour, modest wage growth, and well anchored inflation expectations," the statement said.
Kiwbank chief economist Jarrod Kerr said although the Reserve Bank had scaled down purchases under the LSAP programme, the decision to halt it altogether was a surprise.
"They've effectively removed some stimulus from the market and we've seen rates markets pop higher on the back of that today," Kerr said.
He said swap rates, used by banks to lock in fixed mortgage rates, are 4-5 basis points higher but had not yet passed onto retail rates.
"Expect higher mortgage rates, unless you fix them," Kerr said.
He said the exact timing of OCR rises is more difficult to pick: there are risks in moving too soon. The central bank is indicating inflation rises will be temporary. Without ongoing policy support, it expects medium-term inflation and employment to remain below it's remit.
"We’re still expecting May next year, there's a risk of an earlier move but there's still alot of moving parts," Kerr said.
Earlier on Wednesday, ASB announced rises across its fixed term mortgage rates (and term deposit rates), affecting new borrowers and those with mortgages due to roll over. Borrowers through ASB wanting to fix a rate for one or two years are now paying 2.55 percent and 2.95 percent respectively, the 5-year fixed rate closing in on 4 percent.
Ahead of Wednesday's announcement, ASB chief economist Nick Tuffley said the bank was forecasting a 25 basis point cash rate rise in November, reaching 1.5 percent in late 2023.
Following the announcement, in an 'OCR view update' Tuffley said ASBs cash rate forecast has been brought forward to August.
"The RBNZ has clearly changed tack to decide that the time for reducing monetary stimulus is very near," the report said, acknowleding the timing and pace of cash rate rises depends on inflationary factors and the level of underutilised labour.
Commenting on a graph, she posted on Twitter which is based on MBIE data and shows a huge spike in job ads (over 150 percent) in 2021 compared to 2020, ANZ chief economist Sharon Zollner said it demonstrates an "incredibly tight" labour market.
She said it's a clear signal that the Reserve Bank can "tick that box" when deciding when the cash rate should rise.
The next cash rate announcement will be made as part of a fuller Monetary Policy Statement, to be released on August 18.
