Global Policy Tightening Bets Pared After Delta Delays RBNZ Hike
(Bloomberg) -- The Reserve Bank of New Zealand’s decision to postpone an expected interest-rate hike is leading investors to wonder if the delta variant of coronavirus will force other central banks to do the same.
The RBNZ refrained from increasing the official cash rate Wednesday after the first local case of Covid-19 was reported since February and the country entered a three-day lockdown. Market expectations of rate hikes also have fallen this week in South Korea and Norway -- two countries that had been seen as relatively close to hiking -- as disappointing data from the U.S. and China add to concern that delta’s spread will derail the economic recovery.
“The RBNZ’s decision is symbolic,” said Akira Takei, global fixed-income money manager at Asset Management One Co. in Tokyo. “It signifies the risk of virus infections that other central banks can’t ignore, and it pours cold water on the outlook for tapering and rate hikes globally.”
The progress of vaccination drives has stoked optimism for an accelerating economic recovery in developed economies, just as policy makers grow increasingly concerned about elevated inflation. The RBNZ’s decision came before the Norges Bank policy review Thursday and the Bank of Korea’s next week.
Norway’s central bank is expected to keep its policy stance unchanged for a 15th straight month, but the announcement will be scrutinized for clues to how confident officials are of their ability to hike rates once per quarter in the coming year, as they projected in June.
In South Korea, BOK Governor Lee Ju-yeol has signaled repeatedly that a rate hike is coming this year, citing growing financial risks. While a housing-market rally is pressuring the central bank to trim stimulus -- just like in New Zealand -- soaring virus cases from the delta variant have clouded the outlook.
“Things have changed since July,” Kathleen Oh and Bum Ki Son, economists at Bank of America Corp., wrote in a research note. The BOK is expected to wait until the surge of infections subsides before raising rates, they wrote.
Despite the tempered expectations, rate swaps in South Korea and Norway still suggest a steady pace of rate hikes in the coming three years.
Like the swaps traders, central bankers in Australia and New Zealand are looking past recent outbreaks in anticipation of an eventual economic recovery. The Reserve Bank of Australia stuck with its planned tapering of bond purchases this month, wagering that the economy will recover rapidly once the outbreaks are contained.
RBNZ Governor Adrian Orr said Thursday that the next chance to act will be at the bank’s next policy meeting in October, and reiterated that he intends to embark on a tightening cycle that will lift the official cash rate from the current 0.25% to a “neutral level” of 2%.
For Asset Management One’s Takei, the risks look skewed to the downside. Central bank forecasts about the future policy path and the economy rarely have proven correct, he said, mostly because “they reflect policy makers’ hopes” that an economy will fare well.
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