RBNZ NZ to lift rates next month as Delta contained.

A 25-basis point rate hike in October is currently fully priced in by markets. However, ANZ economists Sharon Zollner and Finn Robinson argue there’s a lot that needs to go right for New Zealand’s central bank to complete its hiking cycle, given the uncertainties that Covid brings.  

In a new report, Zollner and Robinson explore the risks out there that could interrupt this cycle. 

As they see it, the economy was overheating before the current lockdown. Demand is strong, and Covid has imposed significant supply constraints on the domestic and global economies – driving up prices, wages, and inflation expectations.  

The economists are convinced that the Reserve Bank of New Zealand will raise the official cash rate to 1.5 percent by the end of 2022. 

“If the RBNZ were to delay hiking the OCR, it would likely be because the latest lockdown had filtered through into significantly and persistently weaker economic confidence and spending, and higher unemployment,” said Zollner and Robinson. 

“These outcomes seem unlikely right now given timely data on sentiment and spending and encouraging progress on eliminating Covid once more.  

And even if they did happen, the economists continued, persistent impacts take time to identify. Therefore, barring some sudden unforecastable lurch, they firmly believe that the RBNZ will hike the official cash rate in October. 

Beyond that, there are risks. 

Failing to reach target 

However, in the view of Zollner and Robinson, the risks are skewed towards the cash rate failing to reach the RBNZ’s current target of around two percent in this cycle or even changing direction. 

“A number of factors are at play here, including that neutral interest rates are likely to fall further, the supply side of the global economy could recover faster than expected just as demand wanes, reducing inflation pressures, and the unquantifiable risk of an abrupt global risk-aversion event throwing a spanner in the works,” they said. 

“Given all the information currently available, an October hike remains the most appropriate policy option, in our view. 

“While the RBNZ may end up delaying or even reversing their initial rate hikes, the catalysts for such a reversal are not clear nor forecastable, whereas the need to better align demand and supply in the economy is pressing.” 

Meanwhile, New Zealand Prime Minister Jacinda Ardern this week announced the widespread easing of Covid restrictions across New Zealand as the Delta outbreak looks to be largely contained. 

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