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New Zealand is delaying rate hike amid the COVID-19 outbreak, flags will be tightened before year end

Two people walk towards the entrance of the Reserve Bank of New Zealand in New Zealand’s capital Wellington, March 22, 2016. REUTERS / Rebecca Howard / File Photo

  • COVID-19 outbreak forces RBNZ to keep rates at a record low of 0.25%
  • According to RBNZ, the decision to hold interest rates was triggered by the lockdown
  • Politicians are still expecting tightening before the end of the year
  • According to Gov Orr, one has to learn to deal with ongoing COVID disruptions

WELLINGTON, Aug. 18 (Reuters) – The Central Bank of New Zealand postponed interest rate hikes on Wednesday as policy makers quickly switched gears after the country was temporarily suspended for COVID-19 on a handful of new cases, but the bank always expects another increase before the end of the year.

The Reserve Bank of New Zealand (RBNZ) kept the official cash rate at a record low of 0.25%, despite the fact that the economy was scorching hot and a majority of analysts polled by Reuters last week were expecting an increase. Continue reading

Some had said Governor Adrian Orr could even raise interest rates by 50 basis points.

However, New Zealand’s first local COVID-19 infection in six months and a nationwide emergency lockdown ordered Tuesday have put down those expectations, forcing policymakers to now face the risk of a potentially premature move. Continue reading

“Today’s decision was made in the context of imposing level 4 COVID restrictions on activities across New Zealand,” the RBNZ’s Monetary Policy Committee said in a statement.

New Zealand would have made a rate hike for the first time in both the Asia-Pacific and G10 currency blocs, which would have raised rates in the pandemic era.

The Pacific Island’s decision to postpone monetary tightening underscored growing global concern over the spread of the Delta variant in several countries.

The New Zealand dollar briefly fell 0.7% to a nine-month low of $ 0.6862 after the announcement, before stabilizing at around $ 0.6930 as the RBNZ’s forecast still shows an increase on the horizon.

“Reserve Bank was ready to pull the trigger, COVID is coming 24 hours early and they just pulled back,” said Jason Wong, senior market strategist at BNZ in Wellington.

“Meet all the forecasts and signs of inflation and employment (conditions) to raise interest rates. This uncertainty just came from the left and has delayed it.”

“ROLLING MALFUNCTIONS”

RBNZ projections showed that policymakers continue to expect a rate hike in the coming months, with the cash rate (NZINTR = ECI) at 0.50% by the end of the year, 1.5% by the middle of next year, and by the end of 2023 was over 2%.

The markets are now pricing in a 60 percent chance of a hike in October

Governor Orr told reporters at a news conference that the bank’s clear direction is to reduce monetary stimulus and raise the cash rate.

“This hasn’t in some ways put us off this broad path, but it has given us time to pause as we watch the results over the next few days and weeks,” Orr said.

“We are satisfied on the demand side, but our concern right now is supply capacity. So in the medium term we remain on track to cope with this tightening of monetary conditions,” he added.

While most developed economies are still reluctant to migrate, New Zealand’s successful strategy to eradicate COVID-19 has sparked a hot economic recovery and fueled inflation.

However, the vaccination rate in New Zealand is low, leaving the nation of 5 million people vulnerable – a fact underscored by the latest discovery of the highly infectious Delta variant that has handicapped neighboring Australia. Continue reading

Orr said they now have permanent flexibility built in and are less concerned about the impact a COVID outbreak will have on the economy than before.

“We’re going to have rolling stoppages like we see around the world and we need to be able to handle those stoppages,” Orr said.

“That was written in the document … no one expected it to be a live example on the day of this announcement.”

Reporting by Praveen Menon; Adaptation by Shri Navratnam

Our Standards: The Thomson Reuters Trust Principles.

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