Reserve Bank delays interest rate hike because of Delta outbreak

Wednesday, 18 August 2021

The Reserve Bank has left the official cash rate at 0.25 per cent while leaving no doubt it has only delayed higher interest rates because of the community outbreak of the Delta variant.

The bank said the decision had been made for now, “in the context of the Government’s imposition of level 4 Covid restrictions across New Zealand”.

The reintroduction of level 4 restrictions was “a stark example of how unpredictable and disruptive the virus is proving to be”, it said.

But Reserve Bank governor Adrian Orr said the country was in a “good state to continue to grow and prosper even though we have to manage these difficult health situations”.

“We see the country being in a very good position to maintain economic momentum for a long period of ongoing disruptions,” he said.

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The bank’s monetary policy committee agreed that its “least regrets policy stance” was to further reduce the level of monetary stimulus “so as to anchor inflation expectations and continue to contribute to maximum sustainable employment”.

“Members noted that they now had more confidence that rising capacity pressures will feed through into inflation, and that employment is at its maximum sustainable level,” the Reserve Bank said.

But it agreed to keep the OCR unchanged at this meeting “given the heightened uncertainty with the country in a lockdown”, it said.

Orr said the bank had not finalised an alternative course of action ahead of the outbreak.

“Having said that, our clear direction is to be reducing monetary stimulus – that is lifting the official cash rate.”

The lockdown had not shifted it “at all” from that broad path, but it had “given time for ‘pause’ while we observe, like everyone else does, the outcomes of the next few days and weeks,” he said.

Prime Minister Jacinda Ardern says genome sequencing shows the community Covid-19 case is the Delta strain and originated in Australia.

National Party shadow treasurer Andrew Bayly said holding the OCR for now was the right decision.

“The bank has done the right thing, having clearly recognised that it would be a mistake to put further pressure on the economy while we deal with the lockdown.

“That said, there are still strong signals that rapid rate rises are on the horizon, which means the Government must work with the bank, rather than against it, to manage this prudently,” he said.

New forecasts released by the Reserve Bank suggest it would raise the OCR to 1 per cent in the first half of next year and that the rate would stick around 2 per cent in 2023 and 2024.

Those forecasts represent a sea change from the track it outlined for the OCR in May, when it did not expect any rise in the OCR until around the middle of next year.

Orr said those forecasts did not factor-in any particular assumptions about the impact of the current outbreak.

Instead, the bank had built in “permanent flexibility”, he said.

“We don’t believe there is going to be a binary situation where we have the issue or we no longer have the issue, instead we are going to have rolling periods of disruption, as we see around the world, and we are going to have to be able to manage that.”

The Reserve Bank is tipping unemployment to dip just under 4 per cent next year and for annual inflation to peak at 4.1 per cent later this year.

It forecast house prices would fall “modestly” from late next year, but expressed uncertainty about that.

“A more significant fall in prices is possible, but at the same time, momentum in the market could prove more resilient than we expect,” it said.

The bank said wage inflation had increased in line with the tightening labour market, but it was not sure whether higher wage growth would be sustained.

People taking out new loans at ASB will be charged a higher interest rate on a one-year home loan than a five-year home loan.

ASB said it was clear the Covid outbreak was the reason the Reserve Bank had kept rates on hold.

“Otherwise it was clear the bank intended to lift the OCR at an orderly pace starting from today,” it said.

The Reserve Bank’s next scheduled opportunity to begin implementing rate rises will be on October 6, when it is next due to review monetary policy.

ASB is forecasting the OCR will rise by 25 basis points in October “based heavily on the lockdown being short enough to cause little long-term damage” and will reach 1 per cent in February.

Financial markets had fully-priced in a 25 basis point rise in the OCR and partially priced-in a ‘double hike’ of 50 basis points before a community outbreak of the Delta variant was detected in Auckland on Tuesday.

But the outbreak had resulted in many tearing up their expectations of any immediate move.

ANZ chief economist Sharon Zollner played down the significance of the Reserve Bank's decision shortly before the central bank issued its monetary policy statement.

Zollner said it was the health response to the Delta outbreak that mattered most and monetary policy would essentially be a side show this week.

“If the Reserve Bank regrets what they do today … they can rectify it very quickly,” Zollner said.

She described the bank’s statement as a “hawkish hold”.

Prior to Wednesday’s statement from the Reserve Bank the OCR had already been sitting at 0.25 per cent for 17 months.