RBNZ Says Change to Living With Covid-19 May Drag on Economy

(Bloomberg) -- New Zealand’s transition to living with Covid-19 could lead to changes in consumer behavior that damp economic growth, the central bank said.

“Businesses will need to adapt, and some businesses that have stayed afloat to date may not be viable as support schemes wind down,” the Reserve Bank said in its semi-annual Financial Stability Report published Wednesday in Wellington. “These changes could drag on economic activity.” 

After successfully eliminating Covid-19 from the community last year and holding it at bay for a long period, New Zealand is now battling an outbreak of the delta strain that has kept largest city Auckland in lockdown since mid-August. The government has conceded the virus is here to stay and plans to start lifting restrictions when vaccination rates reach 90%.

Speaking at a news conference Wednesday, RBNZ Governor Adrian Orr said Covid-19 is changing the way consumers interact with businesses. 

“People are far less willing to return to financial centers and downtown areas and there’s low occupancy rates across previously very full office blocks,” he said. “That short-term impact of the virus will be a more permanent feature, and it is also accelerating the longer term issue around shopping online and the virtual economy.”

The RBNZ said the transition from pandemic to Covid-19 being an endemic disease also creates financial stability risks, “although the magnitude of these is still hard to gauge at this stage.”

Rate Increases

In October, the bank lifted its official cash rate by a quarter percentage point to 0.5% to curb inflation, which surged to 4.9% in the third quarter, the fastest pace in 10 years. Today’s report reiterated that the Monetary Policy Committee expects to further remove monetary stimulus over time, with future moves contingent on the medium term outlook for inflation and employment.

“Higher interest rates could prove to be a headwind to asset prices both globally and in New Zealand, and there could be heightened sensitivity from the continued rise in debt burdens around the world,” the RBNZ said.

New Zealand house prices have surged about 30% over the past year. The RBNZ said prices are “above their sustainable level, increasing the chance of a correction.”

“Recent buyers are borrowing more relative to their income, and may be vulnerable to higher mortgage rates or a fall in house prices,” it said.

The central bank said it will soon consult on the merits of implementing debt servicing restrictions to lean against housing risks. It also expects banks to be more cautious about high debt-to-income loans given the risks of rising interest rates and to the economic outlook.

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