New Zealand central bank interest rate decision after Covid lockdown

Workers and shoppers eat on the steps of Freyberg Place in downtown Auckland, New Zealand on October 29, 2020, enjoying the freedom from Covid-19 Alert Level 1.

Lynn Grieveson | Newsroom | Getty Images

New Zealand was widely expected to be the first advanced economy to hike rates, but the central bank left rates unchanged on Wednesday after a Covid case prompted the country to announce a nationwide lockdown the day before.

The Reserve Bank of New Zealand said in a statement the decision to keep rates at 0.25% was made “in connection with the government’s imposition of level 4 COVID restrictions on activities across New Zealand”.

Prime Minister Jacinda Ardern imposed a nationwide lockdown on Tuesday when the first Covid case in six months was discovered in Auckland, the country’s largest city.

The city will be on lockdown for seven days starting Wednesday, while the rest of the nation will maintain a three-day lockdown. Level 4 restrictions are the highest in the country and the most restrictive where people must stay at home and can only leave for essential services.

‘Knife edge situation’

By Wednesday morning, the number of cases discovered had risen to seven and was confirmed as a highly transferable Delta variant, according to Reuters.

Paul Bloxham, chief economist for Australia and New Zealand at HSBC, called it an “exceptional 24 hours” and a “very sharp situation”.

“This morning … we find out that it is Delta (variant), and at that point 24 hours ago the market thought the RBNZ would deliver not just 20 but 25 (basis points),” he told CNBC’s Street Signs Asia “.

Ahead of the interest rate decision on Wednesday, Michael Gordon, acting chief economist for New Zealand at the Australian bank Westpac, said he did not expect a rate hike.

“The key here is that the government cannot trust the extent of the (Covid) problem,” he said in a note Tuesday after Ardern’s lock decision.

Analysts mostly expected a rate hike from the central bank, at least until the lockdown was announced. The majority of the 32 economists polled by Reuters expected the central bank to raise the official currency rate by 25 basis points from a record low to 0.50%.

Most central banks around the world have cut interest rates to record lows to prop up their pandemic-hit economies. Governments around the world have incentivized their economies to support businesses.

But New Zealand is among the most successful in the world in keeping its Covid cases in check with tough lockdowns and closings of its borders.

Major central banks in the APAC region are in no hurry to raise key rates … with the exception of New Zealand and Korea.

Maxim Darmet

Fit ratings

Partly due to its zero Covid strategy, the number of Covid cases has so far been kept at around 2,500, including 26 deaths – one of the lowest in the world.

That has helped the economy recover as data shows that economic growth in the first quarter of this year was above expectations. It was mainly driven by strong retail spending, falling unemployment rates and rising house prices.

The combination of minimal Covid restrictions and generous incentives has resulted in a booming economy and rising inflation, leading analysts to expect higher interest rates.

New Zealand dollar is falling

The New Zealand dollar fell to 0.6944 against the US dollar on Wednesday.

The currency has fallen from over 0.70 to over 0.69 since the lockdown was announced on Tuesday.

Bloxham said the New Zealand dollar could rebound once the Covid situation is contained.

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“If (the lockdown) is enough to contain the virus, keep the numbers small and push them back to zero … then you could imagine in a few weeks … there would be some kind of benefit for the New Zealand dollar,” he told the other CNBC’s “Street Signs Asia”.

New Zealand is likely to continue hike rates

With the expected increase now derailed, analysts said it would now depend on the magnitude of the virus situation.

“Regardless of the economic case for higher interest rates, there is nothing to be gained by pushing the (official cash rate) higher now instead of waiting for more clarity about the Covid situation,” said Gordon of Westpac.

He said experience has shown that once restrictions are lifted, activity tends to rebound. “If that happens, the RBNZ will face many of the same problems as before: an economy faced with cost pressures and capacity constraints, with the risk of inflation becoming more stubborn,” he said, adding that the increases will continue will be needed.

Meanwhile, Maxime Darmet, Asia-Pacific economic director at Fitch Ratings, told CNBC that most of the major central banks in the region are unlikely to hike rates anytime soon.

“The major central banks in the APAC region are in no hurry to start raising rates … with the exception of New Zealand and Korea. Generally limited inflationary pressures and Covid-related economic setbacks put APAC central banks ready to keep policy easy, ”Darmet said in an email to CNBC on Tuesday before the New Zealand lockdown was announced.

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