New Zealand's snap COVID lockdown casts doubt over expected rate hike

WELLINGTON (Reuters) – A snap lockdown in New Zealand following new COVID-19 cases may see the central bank back off from a widely forecast interest rate hike on Wednesday, which would have made it the first Asia-Pacific economy to tighten monetary policy in the pandemic era.

FILE PHOTO: Two people walk towards the entrance of the Reserve Bank of New Zealand located in the New Zealand capital city of Wellington, March 22, 2016. REUTERS/Rebecca Howard

The economy is running red-hot and a majority of economists polled by Reuters last week expected the Reserve Bank of New Zealand (RBNZ) to raise the official cash rate (OCR) by 25 basis points from a record low to 0.50%.

Some said Governor Adrian Orr may even deliver a 50 basis point rate hike.

However, New Zealand’s first local COVID-19 infection in six months, reported on Tuesday, and a snap lockdown ordered for the entire nation have hosed down those expectations with some economists now expecting no change.

“Regardless of the economic case for higher interest rates, there is nothing to be gained from pushing the OCR higher now, rather than waiting for more clarity on the Covid situation,” said Westpac New Zealand Acting Chief Economist Michael Gordon, who no longer expects a rate hike.

Others said it would still hike rates but expectations of a more bolder move have tempered.

“The draconian lockdown in response to a fresh case of COVID-19 in the community will probably be enough to see the RBNZ back off the 50 basis point hike we had expected,” said Ben Udy of Capital Economics.

“But the case for tightening remains strong so we think the Bank will still hike rates by 25 basis point and hike rates to 1.00% by the end of this year,” he added.

A hike on Wednesday would make New Zealand the first in the Asia-Pacific and the first of the G10 currency nations to raise rates in the pandemic.

Market expectations for of a 25 basis point rate hike fell to under 80% probability on Wednesday from 100% before news of the lockdown, while those for leaving rates unchanged have gradually increased.

While most developed economies are still holding off hiking, New Zealand’s successful COVID-19 elimination strategy has fired a hot economic recovery and stoked inflation.

A rate hike, however, is not without risks.

New Zealand’s vaccination rate is low, leaving the nation of 5 million vulnerable if the highly infectious Delta variant spreads in the community as it has in parts of neighbouring Australia.

Source: Read Full Article