UPDATED: WEDNESDAY, 10:16AM
Economists from two banks now believe the Reserve Bank (RBNZ) will hold, rather than hike interest rates on Wednesday.
However, economists at the largest bank, ANZ, still think a rise is "odds on", as the market is continuing to bet on a hike.
Westpac and ASB economists changed their Official Cash Rate (OCR) outlooks on Tuesday evening, following the emergence of a community case of COVID-19 prompting a nationwide Level 4 lockdown for at least three days. Auckland and the Coromandel will likely lockdown for a week.
The call comes within 24 hours of the RBNZ being expected to be the first among its international peers to tighten monetary policy and make its first OCR hike in seven years.
Westpac acting chief economist Michael Gordon and ASB chief economist Nick Tuffley now believe the RBNZ will keep the OCR at 0.25% - at least until there’s a bit more certainty around the new COVID-19 case.
Gordon said: “The key here is that the Government cannot be confident about the scope of the problem. Further testing and tracing will be needed in the coming days to establish this."
Tuffley also made the point: “With the Government stepping in with financial support, it also makes little sense for the RBNZ to work in the opposite direction by triggering a lift in borrowing rates."
Robertson: 'It’s the job of the RBNZ to look to the medium-term'
Finance Minister Grant Robertson confirmed he spoke to RBNZ Governor Adrian Orr on Tuesday afternoon, who said the Monetary Policy Statement would still be released on Wednesday as planned.
Robertson said the press conference might not take place in person.
Asked by interest.co.nz whether he was concerned a potential interest rate hike could cool the economy at the same time that a lockdown does just that, Robertson stressed it wasn't his job to comment on RBNZ matters.
But he pointed out: “It’s the job of the RBNZ to look to the medium-term. As you know, that's exactly what they're asked to do.
“They’ve, throughout COVID-19, had to balance short-term issues with medium and long-term objectives, and I’m sure you’ll hear more from the RBNZ about that tomorrow.”
Most traders are still picking a 25-point hike
Triple T Consulting managing director Sean Keane believed the RBNZ would lift the OCR by 25 points, but said a 50-point hike (as was previously seen to be the second-most-likely option) was now off the table.
"The strength of domestic demand is going to require a number of interest rate increases in coming months and a single 25bp increase at this time will be helpful without being disruptive," Keane said.
"Most of the market still expects that to happen, and we agree that it should.
"Assuming that there isn't a widespread outbreak of the Delta variant in New Zealand... our expectation would be that the market should be comfortable pricing in one additional 25bp rate increase this year, and potentially a third one by February 2022.
"If the Delta variant takes hold then the market may only see one rate increase this year.
"Whatever happens tomorrow, the RBNZ’s cover statement is likely to be short and very carefully worded as the MPC [Monetary Policy Committee] simply won't know what the next few weeks are going to look like."
Keane also noted the RBNZ will not have time to make changes to the bulk of the Monetary Policy Statement, which includes projections and commentary.
Health and fiscal response centre stage
ANZ senior economist Miles Workman and strategist David Croy likewise believed the RBNZ would hike the OCR by 25 points.
"Fiscal policy is well placed to support households and businesses through this lockdown, and past experience shows that provided the health response is successful, it’s very effective in supporting confidence and activity," they said.
If the lockdown isn’t prolonged, they maintained the impact on aggregate activity in the third quarter will be minor, factoring in pent-up demand dynamics, the strong starting point for momentum, and fiscal support.
"We think it makes sense for the Bank to react to the known (an overheated economy) and state they are ready to adapt to new info as it comes to hand," Workman and Croy said.
"In “least regrets” terms, neither a short-lived hike in the worst case scenario, or a six-week delay to hiking in the best case scenario, would be a particularly big deal for the economy - it’s much more important that the health and fiscal policy responses are exactly on the mark."
They said the RBNZ faces tough decisions, but the Prime Minister faces tougher ones.
Gordon and Tuffley see the RBNZ moving to tighten quickly when the time is right
Coming back to Gordon, he said: “Experience shows that economic activity tends to bounce back readily once COVID restrictions are lifted. And when that happens, the RBNZ will be left facing many of the same issues as before: an economy that is running up against cost pressures and capacity constraints, with risks that inflation could become more persistent.
“Ultimately, we expect OCR hikes will still be needed, but we will review the likely timing of this as we get more clarity.”
Similarly, Tuffley said: “NZ’s past short-ish lockdowns (August last year, February/March this year) have shown that the lasting economic impacts are relatively light. Spending tends to merely get deferred, with a catch-up period occurring once restrictions ease.
“Provided this lockdown is short, it is likely the underlying economic picture would remain one of an economy that has hit capacity constraints and no longer needs the OCR to stay as low as 0.25%.
“Hence, provided this lockdown is short-lived with little lasting economic impact, we still expect the RBNZ to proceed with a quick start to its tightening cycle.
“That could involve a 25bp hike or even 50bp hike at the following October 6 Review, or even a 25bp hike ahead of the October meeting…
“Also provided the lockdown is short and doesn’t change the underlying economic picture, we would still anticipate the OCR reaching 1.5% by the end of the year.
“Events are going to be fluid, as there is still little known about this latest case.”
47 Comments
Flip floppers or not, what they do is irrelevant in the big scheme of things. NZ is a pimple on the international economic elephants backside.
Probably nothing.
Adrian sits in his office, clutching his 0.25% OCR "hike" speech, still warm from the printer.
He thinks "How did it come to this? If I don't at least raise by one wafer there will be pandemonium. Uch, I HATE this. Oh well, will soon get it over with tomorrow, I suppose."
Suddenly the phone rings; "BOSS BOSS - check the news! We are SAVED!"
Betteridge's law of headlines
The exception to prove the rule https://www.stuff.co.nz/business/opinion-analysis/300384955/are-economi…
One trick pony government. If this is the solution when we need to open up then the country is in big big trouble. Good luck to all those with large mortgage to pay off from he overinflated house market. You better hope your company has it's books in order after this lock down.
Fair point. I actually hate updates myself, as I understand you don't want to re-read the same piece in search of new news! Will try to separate news between stories as much as possible. COVID health updates are probably the exception, as I try to get some news out as quickly as possible while in the press conference, before going back and updating the piece with details.
The more lock downs we have, more finance support we offer, when we get out of lockdown, the inflation will get worse which means OCR will need to go higher. It's just a matter of time. Last year, I've already mentioned that inflation is coming and OCR won't stay low. It's not hard to find out if we check out m2 money supply.
RB will be loving this timing. They just can't bring themselves to hike rates & here's the out, heck they might signal reducing them if/when this lock down goes for 4 weeks. I always go back to RBs rational Aug 19, reducing 50bp as house prices were flat with the threat of declining more than 5%.
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