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New Zealand Dollar Jumps, RBNZ Puts Early End to Bond Buying

SYDNEY, July 14 (Reuters) - The New Zealand dollar jumped on Wednesday when the country’s central bank struck a surprisingly hawkish note by halting its bond buying stimulus programme, spurring speculation it might raise interest rates before the year is out.

The kiwi climbed 1% to $0.7017 after the Reserve Bank of New Zealand ended its monetary policy meeting by saying the strength of the economy meant the current level of stimulus could be reduced.

As a result, it decided to cease buying bonds by July 23, well ahead of what most analysts had assumed.

Market reaction was swift, with yields on two-year bonds surging 9 basis points to its high for this year at 1.668%. Investors had already been wagering a hike could come as early as November given strength in consumer demand, house prices and inflation.

“Today’s message is consistent with a central bank juggling near-term inflation pressures and long-term deflationary forces,” said Jarrod Kerr, chief economist at Kiwibank.

“A rate hike in November is a definite maybe,” he added. “Although November still feels too early because we are still in the beginnings of our vaccine rollout, and much of the inflation pressure we’re experiencing should be deemed transitory.”

A move by November would likely make the RBNZ one of the very first central banks in the developed world to raise rates, putting upward pressure on the kiwi and making the country’s exports less competitive.

It would also be in stark contrast to the Reserve Bank of Australia (RBA) which does not expect to raise rates until 2024. That divergence saw the Aussie drop 0.7% on the kiwi to NZ$1.0645, the lowest since early June.

It fared a little bit better on the U.S. dollar, edging up 0.3% to $0.7461, but was still uncomfortably close to a recent seven-month trough of $0.7410.

Weighing on sentiment was news that a coronavirus lockdown in Sydney was being extended for at least another two weeks, an unwelcome drag on the economy’s recovery.

“The current lockdown and the rate of community transmission of COVID-19 poses a significant risk to the economy over the second half of the year,” warned Gareth Aird, head of Australian economics at CBA.

He said a shutdown of, say, seven weeks would take 1.4 percentage points from gross domestic product and could see GDP shrink by 0.7% in the September quarter.

Still, Aird argued the impact should prove transitory and expected strength in the economy next year to push the RBA into hiking in November 2022.

(Editing by Jacqueline Wong)

Source: Reuters

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