MNI STATE OF PLAY: COVID Complicates RBNZ Rate Hike Prospect

The Reserve Bank of New Zealand meets on Wednesday with expectations of an interest rate hike, but with a chance the central bank could delay the beginning of its tightening cycle because of ongoing pandemic restrictions.

The RBNZ was poised to lift rates from the record low of 0.25% at its August meeting, but an outbreak of the Delta strain of the coronavirus on the eve of the meeting saw the decision deferred and rates were left on hold.

The bank has been transparent since then that an overheating NZ economy requires cooling, with annual inflation now at 3.3% and house prices soaring by more than 20% over the last year, see: MNI BRIEF: RBNZ Policy Could "Inch" Tighter-Hawkesby.

The RBNZ has a macroprudential mandate and has moved to cool the housing market by increasing loan-to-value ratio levels for property market borrowers, but this may not be enough to cool the housing market in the short term.

PANDEMIC UNCERTAINTY

The resurgence of the pandemic, however, and a change of policy from the NZ government from "COVID Zero" to living with the virus, has introduced an element of uncertainty as lockdown restrictions have continued.

Prime Minister Jacinda Ardern on Monday announced a gradual relaxation of restrictions but gave no date for a full exit from lockdown.

Before the August outbreak the central bank was expected to raise rates by 25 basis points, with some expectations of either a 50-basis point hike or two rate rises this year to take the Official Cash Rate to 1.0%.

At the last meeting, RBNZ Governor Adrian Orr said there is a "clear direction" to tighten monetary policy, but it is "time to pause while we observe the outcomes of the next few days and weeks." In its statement, the RBNZ said that under its "least regrets" policy stance it was inclined to "further reduce the level of monetary stimulus" to control inflation and contribute to sustainable employment.

Former RBNZ officials have been among the most hawkish on the prospects of an October rate hike, see: MNI INTERVIEW: RBNZ Set To Hike In October Despite Lockdowns.

NEXT MEETING IN NOVEMBER

The RBNZ will not release a Monetary Policy Statement at Wednesday's meeting, and usually times changes in policy settings with the release of statements.

In normal circumstances this would suggest that the bank would leave rates on hold tomorrow, but the current circumstances are not normal.

If the RBNZ decides to leave rates on hold tomorrow while it awaits the timetable on full economic re-opening its next opportunity to act will be in late November.