The Reserve Bank of New Zealand (RBNZ) yesterday refrained from raising interest rates amid a COVID-19 outbreak and nationwide lockdown, but left little doubt it intends to start lifting them soon.
The Reserve Bank’s Monetary Policy Committee kept the official cash rate (OCR) at 0.25 percent, but RBNZ Governor Adrian Orr said the decision was made in light of the lockdown and that policy was on hold “for now.”
Projections published by the RBNZ show the OCR rising at least once later this year, suggesting hikes are imminent if the outbreak is contained.
Photo: Bloomberg
“The committee discussed the merits of an increase in the OCR at this meeting,” the RBNZ said.
“The committee agreed that their least regrets policy stance is to further reduce monetary policy stimulus to reduce the risk that inflation expectations become unanchored. However, in light of the current Level 4 lockdown and health uncertainty, the committee agreed to leave the OCR unchanged at this meeting,” it said.
Should the lockdown succeed in stamping out community transmission of the virus, the RBNZ could raise rates as soon as its next meeting in October.
It published a forward track for the OCR showing an average of 0.59 percent in the fourth quarter, implying there is a chance of more than one quarter-point increase.
The track shows the OCR rising to 2 percent by the end of 2023. In its previous forecasts in May, the RBNZ did not expect to start raising rates until the second half of next year.
ANZ Bank New Zealand chief economist Sharon Zollner said the RBNZ’s decision was a “hawkish hold.”
“If we get out of this quickly, game on,” she said. “We now expect hikes in October, November, February, May and August next year, taking the OCR to 1.5 percent. However, our forecasts are also highly conditional on successful elimination of this outbreak.”
Speaking at a virtual news conference with reporters, Orr said the resumption of government subsidies to assist workers and businesses affected by the lockdown would help the economy to maintain its pace of growth, and stressed that the RBNZ intends to raise rates.
“I want this conference to understand that our general path is to be tightening monetary conditions,” Orr said. “We see the country as being in a very good position to maintain economic momentum for a long period of ongoing disruptions. We are in good stead to continue to grow and prosper, even though we have to manage these difficult health situations.”
New Zealand’s prior success at keeping the virus at bay paved the way for stronger-than-expected growth in the first quarter, faster inflation and a more robust labor market.
Unemployment has tumbled to 4 percent and inflation has surged to 3.3 percent — the first time it has exceeded the RBNZ’s 1 to 3 percent target band since 2011.
The central bank’s forecasts show inflation accelerating to 4.1 percent this quarter.
New Zealand’s tough border policy has also shut out migrant workers, creating labor shortages and exerting upward pressure on wages.
“Capacity pressures are now evident in the economy, particularly in the labor market where job vacancies remain high despite the recent decline in unemployment and underemployment,” the RBNZ said.
The RBNZ unexpectedly ended quantitative easing last month, a sign it was concerned about the potential for overheating from its stimulus settings.
Still, the bank said it remains alert to the supply disruptions that COVID-19 can create, and the dampening effect this can have on confidence.
“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 RBNZ said.
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