RBNZ Refrains From Raising Rates ‘For Now’ as Delta Spreads

(Bloomberg) -- New Zealand’s central bank refrained from raising interest rates during a coronavirus outbreak and nationwide lockdown but left little doubt it intends to start lifting them soon. 

The Reserve Bank’s Monetary Policy Committee on Wednesday kept the official cash rate at 0.25%, but Governor Adrian Orr said the decision was made in light of the lockdown and that policy was on hold “for now.” Projections published by the RBNZ show the OCR lifting at least once later this year, suggesting hikes are imminent if the outbreak is contained.

“The Committee discussed the merits of an increase in the OCR at this meeting,” the RBNZ said. “The Committee agreed that their least regrets policy stance is to further reduce monetary policy stimulus to reduce the risk that inflation expectations become unanchored. However in light of the current Level 4 lockdown and health uncertainty the Committee agreed to leave the OCR unchanged at this meeting.”

Before news broke yesterday of New Zealand’s first community case of Covid-19 since February, investors and most economists expected the RBNZ to embark on a tightening cycle to cool an overheating economy, a rampant housing market and accelerating inflation. But the highly infectious delta variant, which is challenging virus containment efforts around the world, has the potential to re-write New Zealand’s economic outlook. 

Prime Minister Jacinda Ardern yesterday put the country into a three-day, Level 4 lockdown -- the harshest setting that requires most people to stay at home -- after the discovery of one community case. Six further cases were reported today, all linked to the initial infection that was confirmed as the delta variant.

The New Zealand dollar dropped on the rate decision but quickly recouped all of its lost ground. It bought 69.32 U.S. cents at 4:46 p.m. in Wellington, little changed from beforehand. Bond yields and swap rates also fully reversed initial losses as investors focused on the RBNZ’s clear tightening bias.

‘Hawkish Hold’

Should the lockdown succeed in stamping out community transmission of the virus, the RBNZ could raise rates as soon as its next meeting in October. It published a forward track for the OCR today showing an average of 0.59% in the fourth quarter, implying there is a chance of more than one quarter-point increase.

The track shows the OCR rising to 2% by the end of 2023. In its previous forecasts in May, the RBNZ didn’t expect to start raising rates until the second half of next year.

ANZ Bank New Zealand chief economist Sharon Zollner said the RBNZ’s decision was a “hawkish hold.”

“If we get out of this quickly, game on,” she said. “We now expect hikes in October, November, February, May, and August next year, taking the OCR to 1.5%. However, our forecasts are also highly conditional on successful elimination of this outbreak.”

Speaking on a virtual news conference with reporters, Orr said the resumption of government subsidies to assist workers and businesses affected by the lockdown will help the economy to maintain its pace of growth, and stressed that the RBNZ intends to raise rates. 

Tightening Path

“I want this conference to understand that our general path is to be tightening monetary conditions,” Orr said. “We see the country as being in a very good position to maintain economic momentum for a long period of ongoing disruptions. We are in good stead to continue to grow and prosper even though we have to manage these difficult health situations.” 

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. Unemployment has tumbled to 4% and inflation has surged to 3.3% -- the first time it has exceeded the RBNZ’s 1-3% target band since 2011.

The central bank’s forecasts show inflation accelerating to 4.1% in the current quarter.

New Zealand’s tough border policy has also shut out migrant workers, creating labor shortages and exerting upward pressure on wages. 

“Capacity pressures are now evident in the economy, particularly in the labor market where job vacancies remain high despite the recent decline in unemployment and underemployment,” the RBNZ said. 

Should the central bank raise rates in coming months, it will make New Zealand one of the first developed nations to begin tightening policy in the wake of the pandemic. In the Asia-Pacific region, the Bank of Korea has also flagged its commitment to normalize policy. The BOK meets next week with a possible rate rise on the agenda.

Not Alone

“There is a queue of countries talking about what we are talking about today, so we aren’t on our own,” Orr said. “Most of those are small, open economies like New Zealand.”

The RBNZ unexpectedly ended quantitative easing in July, a sign it was concerned about the potential for overheating from its stimulus settings.

Still, it said today it remains alert to the supply disruptions that Covid-19 can create, and the dampening effect this can have on confidence.

“Today’s re-introduction of Level 4 restrictions to activity across New Zealand is a stark example of how unpredictable and disruptive the virus is proving to be,” the RBNZ said.

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