The Reserve Bank of New Zealand kept the official cash rate or the interest rate on hold at 0.25% on Wednesday (18 August) after a single case of COVID-19 was detected in Auckland yesterday that immediately sent the country into a lockdown.
“The Monetary Policy Committee agreed to retain the current stimulatory level of monetary settings, keeping the Official Cash Rate (OCR) at 0.25% for now. Today’s decision was made in the context of the Government’s imposition of Level 4 COVID restrictions on activity across New Zealand,” the central bank said in a statement.
At a press conference after the RBNZ’s announcement, the central bank governor Adrian Orr reiterated that the, “general path is to be tightening monetary conditions”.
New Zealand economy "strong"
“New Zealand has been less impacted to date from COVID-19, our economy has been stronger. We have come up against capacity pressures sooner and hence monetary conditions may need to move sooner,” Orr said.
What backed up Orr’s hawkish tone was the RBNZ’s revised track for raising the OCR to just above 2% by September 2024, as compared to just less than 2% it had previously forecast at its meeting in May 2021.
Economists and the markets had been expecting at least a 25 basis points hike at Wednesday’s meeting before the COVID-19 case was detected in Auckland on Tuesday (17 August). However, the imposition of a lockdown led to economists changing their forecasts while markets reacted on Tuesday itself.
Kiwi dollar gains
Immediately after the central bank’s announcement, the Kiwi dollar was flat versus the dollar. Later in the day, the Kiwi gained and at late afternoon in Wellington the NZD was 0.38% higher than the previous close at 69.37 US cents. The yield on the 10-year New Zealand government bond was also flat at 1.68% after seeing the biggest fall since March on Tuesday (17 August).
Economists continue to expect the RBNZ to increase rates as soon as the COVID-19 concern abate. “It’s very clear that the RBNZ would have hiked today were it not for this week’s abrupt developments, and that this is viewed as a temporary hiatus,” Sharon Zollner, chief economist at Australia and New Zealand Banking Group, wrote in a note.
Rate rise delayed not cancelled
“All going well, the RBNZ expects to raise the OCR steadily, to 2.14% by the end of the forecast period, September 2024. This is a much more aggressive track than in the May MPS, where the OCR hit 1.78% by mid-2024,” she added.
What is your sentiment on NZD/USD?
Michael Gordon, acting chief economist at Westpac also agrees that the rate hike has merely been delayed. “The RBNZ intends to lift interest rates over the coming years, but held fire this time given the level of uncertainty about this new outbreak. Indeed, while the projected OCR track, still implied at least one rate hike by the end of this year, it’s too early to take any meaningful guidance from this as to the timing of the first move,” he wrote in a note.
Ben Udy, Australia and New Zealand economist at Capital Economics said that today’s decision shows that the central bank is taking a “cautious approach” in light of the latest lockdown. “Assuming restrictions can be eased before long we still expect the RBNZ to hike rates to 1% by the end of the year,” he wrote in a note.
Udy added that key uncertainty to the outlook is how long the restrictions remain in place. “Assuming the disruption is relatively brief as has been the case with each past temporary lockdown in New Zealand, we still think the Bank will need to hike rates further in the months ahead,” he wrote.