MNI STATE OF PLAY: Oct RBNZ Rate Hike Likely If Lockdowns End

The length of new pandemic restrictions will determine when the Reserve Bank of New Zealand moves to tighten monetary policy, after a single COVID case in Auckland prompted a sudden lockdown which saw the bank unexpectedly leave rates unchanged on Wednesday.

An increase in the Official Cash Rate from the record low of 0.25% was widely seen in response to a booming housing market, rising inflation and tight capacity in the labour market. Unemployment is at 4.0% and businesses are struggling to source workers, see:.MNI: RBNZ "On Course" To Tighten Despite Lockdown, Says Orr.

Expectations for a hike of 25 to 50 basis points however were put on hold over uncertainty over the re-imposition of restrictions after one new COVID-19 case was identified on Tuesday. Another seven cases were identified on Wednesday.

The RBNZ's next rates decision is in October, with expectations of a hike then if the lockdown ends.

A CLEAR DIRECTION

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."

Orr told a press conference that NZ house prices, which have surged 30% in the year to the end of July, were at unsustainable levels and the market needed to be checked.

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.

The Monetary Policy Committee had agreed unanimously, however, to keep the OCR unchanged "given the heightened uncertainty with the country in lockdown."

BOND PURCHASES

The RBNZ has also purchased NZD53 billion in government debt under its Large-Scale Asset Purchase program, which it ended in July well short of the NZD100 billion limit.

The bank could sell some of these bonds, depending on market conditions, and Assistant Governor Christian Hawkesby said the first decision would be whether to re-invest after the maturity of the 2023 bond series.

The RBNZ would soon communicate its intentions on its bond holdings to the market, but Hawkesby said the bank did not typically re-invest maturing assets.