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MNI (Sydney)

The Reserve Bank of New Zealand expects only a short lockdown as a result of a new Covid-19 outbreak and is prepared to start tightening as early as October in the face of rising house price inflation, according to Deputy RBNZ Governor Geoff Bascand.

In an interview on Tuesday with MNI, Bascand said the central bank was "watching and waiting" developments but he did not believe that a "six-week delay in a tightening cycle makes much difference in the long term."

At its meeting last week, the RBNZ held its official cash rate steady at the record low of 0.25%, citing a sudden lockdown of the economy late on the previous day due the discovery of a Covid-19 case in Auckland, which has since expanded.

The bank had been expected to increase rates by at least 25 basis points, see: MNI STATE OF PLAY: Oct RBNZ Rate Hike Likely If Lockdowns End.

"The tightening cycle is on hold, but we start from what was a projected reduction in stimulus to now waiting to see where this will go," said Bascand.

"But when we talk about tightening, we are talking about moving away from extremely loose conditions to somewhat less loose over time, and we are still a long way from neutral."

LEVEL 4 LOCKDOWN

New Zealand is currently in a strict Level 4 lockdown as the outbreak has grown to over 100 cases. The government has a zero Covid-19 policy.

The housing market has stalled as a result of the lockdowns, and Bascand said that a combination of higher interest rates and increased construction would be the biggest influence on house prices, which have increased 30% in the last year and become "unsustainable" according to the central bank.

Before the Covid-19 case was reported just ahead of the August monetary policy meeting, one former RBNZ official had called for a rate hike of 50 basis points.

"This is a curve ball which has come in, and if it goes on for two or three months then it's a different world, but if it's a few weeks we can come back to our decision in October with some more certainty on how the economy is playing out," Bascand said.

MNI Sydney Bureau | +61-405-322-399 | lachlan.colquhoun.ext@marketnews.com
MNI Sydney Bureau | +61-405-322-399 | lachlan.colquhoun.ext@marketnews.com