Delta outbreak set to halt rate hike

The Reserve Bank was widely expected to lift the OCR at its latest meeting this afternoon, however an outbreak of the more contagious delta variant of Covid-19 has changed the picture.

Economists at ASB suggest New Zealand will play it safe and keep the central bank rate at 0.25%. 

Financial markets had already priced in rate increases and ANZ yesterday announced a raft of rate hikes ahead of the RBNZ decision.

Yet the call appears to have been premature, with the entire country moving into level four, and Auckland and the Coromandel Peninsula in full lockdown for at least seven days. 

ASB's chief economist Nick Tuffley said: 

"We expect the RBNZ will hold fire on August 18, keeping the OCR steady at 0.25%. Given that NZ is heading into a snap level four lockdown (the strictest level in NZ), it is logical that the RBNZ will pause until more certainty over the extent of the community Covid outbreak and lockdown is established." 

Tuffley said an interest rate rise now made "little sense", as ministers plan to roll out financial support packages.

"With the Government stepping in with financial support, it also makes little sense for the RBNZ to work in the opposite direction by triggering a lift in borrowing rates."

Although today's rate hike now looks on hold, Tuffley expects the central bank to continue with rate increases later this year, if the lockdown is successful.

"We still expect the RBNZ to proceed with a quick start to its tightening cycle. That could involve a 25bp hike or even 50bp hike at the following October 6 review, or even a 25bp hike ahead of the October meeting."

ANZ disagrees

ANZ's team of economists believe the Reserve Bank could go ahead with a rate rise.

ANZ economist Miles Workman and strategist David Croy said the decision was a "tough call" for the RBNZ, but said a 25 basis point hike "remains odds on".

"Fiscal policy is well placed to support households and businesses through this lockdown, and past experience shows that provided the health response is successful, it’s very effective in supporting confidence and activity."