New Zealand Shows How Quickly Delta Can Upend Rate-Hike Bets

(Bloomberg) -- It took just one case of Covid-19 for the New Zealand government to impose a nationwide lockdown -- and for traders to suddenly question a rate hike that was previously seen as a done deal. 

Investors now see a 60% chance that the Reserve Bank of New Zealand will raise rates later on Wednesday, compared with more than 100% earlier this week, swaps data show. The shift followed the country reporting its first community case of Covid since February, prompting Prime Minister Jacinda Ardern to announce a three-day lockdown. A further four cases were confirmed early Wednesday, all believed to be the highly infectious delta strain.   

New Zealand’s previous success at keeping the virus at bay paved the way for stronger-than-expected growth in the first quarter, faster inflation and a more robust labor market. Most economists expected the RBNZ to increase the official cash rate by 25 basis points to 0.5% on Wednesday to prevent the economy from overheating, according to a Bloomberg survey.

That changed with news of the delta outbreak. Forecasters from Westpac Banking Corp and ASB Bank Ltd adjusted their call, saying they now expect the central bank to keep the OCR on hold Wednesday to gauge the economic impact of the lockdown. 

Benchmark bond yields on Tuesday suffered their steepest decline since March and the New Zealand dollar had its worst performance in three months, prompting traders to cut their bullish positions on the currency, particularly against its Australian counterpart. The kiwi bought 69.19 U.S. cents at 9:45 a.m. in Wellington, down from 70.18 cents yesterday before the new Covid case was announced.

“The timing is impossibly difficult for NZD longs,” John Hardy, head of FX strategy at Saxo Bank, wrote in a note. “I think it is bad optics to hike now and would expect a statement saying that the previous set of market expectations seemed appropriate.”

An RBNZ spokesman confirmed that the rate decision and quarterly Monetary Policy Statement, which contains fresh forecasts for the cash rate, will be published as scheduled at 2 p.m. local time. The press conference with Governor Adrian Orr, scheduled for 3 p.m., is likely to be held via Zoom, the spokesman said. 

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