Reserve Bank puts its hope in government wage subsidies to flow through into consumer spending.

The Reserve Bank has signalled clear concern about the impact of Level 4 Covid-19 lockdown on the economy, by agreeing to hold the Official Cash Rate at its all-time low of 0.25 percent, for now.

Governor Adrian Orr said the need to reinstate Covid-19 containment measures in some parts of the world highlighted the serious health and economic risks posed by the virus.

“Persistent and elevated health risks are promoting ongoing global supply chain disruptions, and are acting to constrain productive capacity and prolong inflationary pressures. 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.”

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The Bank’s Monetary Policy Committee met on Wednesday morning, hours after the country was put into Level 4 lockdown under the shadow of the community transmission of the Covid-19 Delta variant. 

The committee had been expected to hike interest rates by quarter or half a percentage point – but as it candidly acknowledged, the Delta variant put paid to that.

Consumer inflation is forecast to exceed 4 percent, the committee said; the number of people in jobs is already at or above maximum sustainable employment; wages are rising; house prices continue to soar.

All weather vanes pointed to an increased to the OCR – until a 58-year-old Devonport tradie tested positive. His diagnosis has been quickly followed by that of six 20-somethings; his young apprentice and five friends and flatmates.

“The committee remains alert to the supply disruptions that Covid-19 can create, and the dampening effect this can have on confidence,” Orr conceded. “House prices are also above their sustainable level, heightening the risk of a price correction as supply increases.”

The committee noted the considerable uncertainty that existed about the longer-run impacts of Covid-19, particularly with the emergence of new variants. “Globally, periods of health-related mobility restriction are likely to continue for some time, creating ongoing short-term economic disruptions, supply cost pressures, and lower productive capacity.”

That uncertainty was mirrored in New Zealand with new community cases and the move back to alert level four. “The reinstatement of the Government Wage Subsidy Scheme and Covid-19 Resurgence Support Payments is expected to significantly buffer the loss of income associated with the lockdown,” the committee said.

“Experience over the past 12 months has provided more confidence about the resilience of domestic demand in the face of health-related restrictions.

“The Government Wage Subsidy proved effective in supporting domestic incomes and providing job security through periods of lockdown, which has enabled a rapid recovery in consumer spending. This scheme has been rapidly reinstated in light of the current lockdown.

“While some households suffered income losses and accumulated debt, many households retain a larger buffer of savings, which could provide ongoing support to consumption.

“The committee discussed the current, and risk of future outbreaks of Covid-19 in New Zealand, and how monetary policy should respond. It agreed fiscal policy (government spending and transfer payments) has proved to be a very effective tool to respond to any immediate reduction in demand in the event of outbreaks. A monetary policy response may be required if a health-related lockdown has a more enduring impact on inflation and employment.”

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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