The new outbreak of Covid-19 in New Zealand changed the Reserve Bank’s big monetary policy announcement this afternoon, when they kept the the Official Cash Rate (OCR) at 0.25 per cent for now.
The bank, in a statement, said that today’s decision was made in the context of the Government’s imposition of Level 4 COVID restrictions on activity across New Zealand.
"The Committee will assess the inflation and employment outlook on an ongoing basis, with a view to continue to reduce the level of monetary
stimulus over time so as to best meet their policy remit.
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"Today’s re-introduction of Level 4 restrictions to activity across New Zealand is a stark example of how unpredictable and disruptive
the virus is proving to be," the statement said.
Lifting the Official Cash Rate (OCR) for the first time in seven years in response to rising inflation and runaway house prices is still in the Reserve Bank's sightlines, but right now they are confident of meeting their inflation and employment remit with less need
"However, the Committee remains alert to the supply disruptions that COVID-19 can create, and the dampening effect this can have on confidence. House prices are also above their sustainable level, heightening the risk of a price correction as supply increases."
The Prime Minister has announced that the country will move to alert level four for a minimum of three days, with Auckland and Coromandel under alert level four restrictions for a minimum of seven days in response to the new community case.
The markets have already responded with a sharp fall in the Kiwi dollar, but economists last night predicted that uncertainty around the new outbreak will alter the Reserve Bank's immediate calls.
Independent economist Tony Alexander told OneRoof ahead of the Prime Minister’s and Reserve Bank's statements that a lot depended on the severity of the outbreak. “It depends. If we’re like New South Wales, which is coming up for two months of lockdown, or Melbourne with 200 days [since Covid started], they might have a rethink or look at a delay," he said.
“But what we’ve learned is that the minute lockdown is over we all rush out and start buying each others houses and spa pools and splurge. So it won’t greatly change the Bank’s outlook."
Infometrics principal economist Brad Olsen predicted to OneRoof that a hard lockdown would cause the Reserve Bank to hold off on announcing any changes, given the uncertainty. “They’ve got time on their side, given their announcement isn’t until 2pm tomorrow. There might be some people doing late nights tonight and they might make some changes," he said.
“They might signal that they still intend to lift interest rates in the next six weeks when they make their next policy statement.
“What we’ve learned is that the New Zealand economy is incredibly resilient to Covid, so we’re not likely to get sustained hurt and the current pressures like supply chain and labour shortages are all likely to return. So we’ll still need to increase the rates for inflation.”
CoreLogic head of research Nick Goodall said that the Reserve Bank would have planned for the possibility of new lockdown. "Going into this, the [OCR rise] still needs to happen," he said.
"Longer term, it depends on the response. During the last national lockdown last year we got support straight away - wage subsidies, mortgage deferrals. We'd never seen such support by central government and the banks. If they do that again, then technically we should be OK.
"We're used to working from home, but it will be businesses like hospitality who've only just managed to hang on, but every little thing starts to add up and we might see some failing and vulnerability."
James Wilson, head of valuation at OneRoof's data partner Valocity, said that the Reserve was unlikely to delay its long term plans. "They won't make knee-jerk changes. It's early days and it doesn't warrant it," he said.
"We've seen before that the market impact of lockdowns on buyer behaviour takes a while to flow through. The heat is still there, we don't know how long [lockdown] or how widespread the cases are. If it's a short sharp response then it probably doesn't warrant any policy changes."
Talking to the NZ Herald earlier yesrterday afternoon, Westpac senior markets strategist Imre Speizer said: "I think everyone has got to re-think what we will get tomorrow. We will probably still get a hike, but the commentary might be different as a result of this event."
