Emerging economic consensus that the move into lockdown should cause Reserve Bank to rain-check any hike to interest rates today.
It’s not often the Reserve Bank is faced with a “live” OCR decision but they certainly have one of their hands today. Just as it seemed all but certain they would hike the official cash rate by at least 0.25 percent at 2pm, the country has once again been unexpectedly plunged into a Level 4 lockdown.
All things considered, its likely the RBNZ will stick to its guns, though currency markets seem to have their doubts.
The NZ dollar fell sharply against the US dollar on news of the lockdown trading at 69.21 US cents, down 1.4 percent, and threatened to fall below 69 cents, a level it has held since November.
A new consensus began to form overnight among economists: that the Reserve Bank would (or at least, should) hold interest rates.
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Westpac economist Michael Gordon has revised his earlier forecast of a hike and is now expecting the Reserve Bank to leave the OCR on hold.
“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.”
ASB chief economist Nick Tuffley says he too expects the Reserve Bank to keep the OCR on hold, rather than lift it.
“A suspected community Delta COVID case (and four infections linked to it so far) and the snap Level 4 lockdown mean the Reserve Bank is making a decision in the blind about the extent of the outbreak,” he explains. “Assuming the lockdown is relatively short, we’d expect the Reserve Bank to lift the OCR from October.”
Economist Shamubeel Eaqub also believes the bank is acting prematurely if it does decide to hike, particularly given the global context.
“The latest increase in inflation was largely catch-up and mainly stimulus money washing through. Delta is clearly causing massive issues in Australia; China is dealing with port closures and supply chain effects and the US has seen consumer confidence plunge to its lowest level in a decade. This is hardly the backdrop for rates rises.”
When it comes to dealing with a rampant property market, Eaqub is adamant rate rises are not the answer.
“The Reserve Bank should massively raise lending restrictions, something it should have done well before now.”
Taking the other side is ANZ chief economist Sharon Zollner, who believes the Reserve Bank will stay the course.
“For now the market pricing has moved from a 20 percent chance of a double hike to a 20 percent chance of no hike at all. I think that’s fair. There’s not enough information yet for the RBNZ to change its forecasts, but it certainly highlights the uncertainty of the world we live in.”
As Zollner points out, the Monetary Policy Committee has tended to take the approach of doing what’s right given the information it has, while acknowledging that the world is a very uncertain place and reserving the right to change their minds should circumstances permit.
It seems it will get one last chance to change its mind when it meets this morning to reconfirm the decision, whatever it is, based on the latest available information.
No doubt a few bottles of red wine amongst market participants could be changing hands around 2pm today. (This correspondent included)
It’s shaping up to be not only a historic decision (the first rate rise since 2014 and the longest period without a rate rise since the OCR was introduced in 1999) but also an unprecedented one if the Reserve Bank does decide to hike the OCR in the middle of a lockdown.
It’s also certain to attract plenty of attention at Jackson Hole in the US next week when the world’s central bankers gather for their annual conference.