RBNZ Says Communication Difficulty Delayed Rate Hike, Not Delta

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New Zealand’s central bank decided not to raise interest rates last week because of communication challenges, not economic risks, Assistant Governor Christian Hawkesby said.

It would have been difficult to explain an increase in the official cash rate on the same day the country entered a lockdown to combat a Covid-19 outbreak, Hawkesby told Bloomberg in a telephone interview Tuesday in Wellington. He also said policy makers considered raising the OCR by as much as half a percentage point.

“We put out a document that would have easily supported putting up the official cash rate last week,” Hawkesby said. “It was less about Covid stopping us doing it and it was more about the timing of communicating our policy move -- was the 18th of August the right day as the country went into lockdown.”

The comments leave little doubt that the Reserve Bank is eager to embark on a tightening cycle at its next OCR review on Oct. 6 and won’t be deterred by the current delta outbreak, which prompted the first nationwide lockdown in more than a year. After the RBNZ held the OCR at 0.25% last week and the outbreak grew, investors scaled back bets on an October move, but Hawkesby stressed the central bank is focused on the economic outlook, not the duration of the lockdown.

“Our decisions around monetary policy aren’t going to be tightly linked to Covid and whether we’re in lockdown or not, or what level of mobility restrictions are in place, in part because one of the big lessons over the last 18 months is how Covid’s impacted both the demand and the supply side of the economy,” he said. “It’s likely, going into the future, that we’re going to be in an environment where we need to live with Covid in its various forms.”

The New Zealand dollar rose as much as half a U.S. cent after the interview was published late Tuesday as investors priced greater odds of a rate hike in October. They now see an 88% chance of a quarter-point increase, up from less than 50% earlier this week, according to swaps data Wednesday in Wellington.

A tight labor market, capacity constraints and inflation above the RBNZ’s 1-3% target band have convinced the bank that it needs to get the cash rate back to a neutral level of 2%. Hawkesby said the Monetary Policy Committee gave serious thought to an aggressive start to its tightening cycle.

50 Points

“A 50 basis point move was definitely on the table in terms of the options that we actively considered,” he said.

Asked if a 50-point hike would again be on the table in October, he said it would come down to “how far away are we from where we think we need to be” and “what have we learned about the economy in the meantime.” Another key ingredient would be inflation expectations, he said.

While the next meeting is a rate review rather than a quarterly Monetary Policy Statement with fresh forecasts, Hawkesby said “every meeting is a live meeting” and policy makers would have enough information to act.

He said there had been key lessons learned over the last year. The initial lockdown at the outset of the pandemic didn’t deliver the massive recession, soaring unemployment and deflation that had been feared, and the demand side of the economy had proved to be “much more resilient” than expected, he said.

“Lockdowns have been about delaying the timing of spending rather than taking away spending in total,” Hawkesby said.

However, supply-side impacts “have been more prolonged and persistent than we expected” and “that’s the environment where you get inflation pressures coming through,” he said.

©2021 Bloomberg L.P.

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