Workers and shoppers eat on the steps of Freyberg Place in downtown Auckland, New Zealand on October 29, 2020, enjoying the freedom of Covid-19 Alert Level 1.
Lynn Grieveson | Press room | Getty Images
New Zealand was widely expected to become the first advanced economy to raise interest rates, but the central bank left rates unchanged on Wednesday after a case of Covid led the country to announce a lockdown nationwide a day earlier.
The Reserve Bank of New Zealand said in a statement that the decision to keep rates at 0.25% was made “against the backdrop of the government’s imposition of level 4 COVID restrictions on activity in New Zealand”.
Prime Minister Jacinda Ardern imposed a nationwide lockdown on Tuesday when the first case of Covid in six months was discovered in Auckland, the country’s largest city.
The city will be closed for seven days from Wednesday, while the rest of the country will observe a three-day closure. Level 4 restrictions are the highest in the country and the most restrictive, where people must stay at home and can only leave for essential services.
As of Wednesday morning, the number of detected cases had risen to seven and was confirmed to be the highly transmissible delta variant, according to Reuters.
Paul Bloxham, chief economist for Australia and New Zealand at HSBC, called it an “extraordinary 24 hours” and a “very delicate situation”.
“This morning… we find that it’s delta (variant), and, you know, at that point 24 hours ago, the market thought the RBNZ would not only deliver 20 but 25 (basis points) “, did he declare. CNBC’s “Street Signs Asia”.
Ahead of Wednesday’s rate decision, Michael Gordon, acting chief economist for New Zealand at Australia’s Westpac bank, said he did not expect a rate hike.
“The key here is that the government cannot be confident about the extent of the problem (Covid),” he said in a note on Tuesday, after Ardern’s lockdown decision.
Analysts mainly expected the power plant to raise rates, at least until the lockdown was announced. The majority of the 32 economists polled by Reuters expected the central bank to raise the official policy rate by 25 basis points from a record low to 0.50%.
Most central banks around the world have cut rates to record levels in an attempt to support their economies affected by the pandemic. Governments around the world are injecting stimulus into their economies to support businesses.
But New Zealand has been among the most successful in the world at controlling their Covid cases with strict closures and the closure of its borders.
Partly due to its zero Covid strategy, the number of Covid cases has so far been kept at around 2,500 cases, including 26 deaths – among the lowest in the world.
This helped the economy rebound, with data showing that economic growth in the first quarter of this year was above expectations. It was mainly due to strong retail spending, falling unemployment rates and soaring house prices.
The combination of minimal Covid restrictions and generous stimulus measures has led to a booming economy and rising inflation, leading analysts to expect higher interest rates.
New Zealand dollar falls
The New Zealand dollar fell to 0.6944 against the US dollar on Wednesday.
The currency has been down since the lockdown announcement on Tuesday, going from over 0.70 to over 0.69.
Bloxham said the New Zealand dollar could recover once the Covid situation is contained.
“If (the lockdown) is enough to contain the virus, to keep the numbers small and bring it down to zero… then you would imagine in a few weeks… the economy is back on track and similarly there would be in some way. sort on the rise against the New Zealand dollar, ”he told CNBC’s“ Street Signs Asia ”.
New Zealand set to raise rates again
With the expected rise now derailed, analysts said it would now depend on the extent of the virus situation.
“Whatever the economic argument for raising interest rates, there is nothing to be gained from pushing the (official cash rate) higher now, rather than waiting for more clarity on the Covid situation, ”said Gordon of Westpac.
He said experience shows that economic activity tends to rebound once restrictions are lifted. “When that happens, the RBNZ will face many of the same problems as before: an economy that faces cost pressures and capacity constraints, with risks of inflation becoming more persistent,” he said, adding that increases will continue to be necessary.
Meanwhile, Maxime Darmet, director of Asia-Pacific economics at Fitch Ratings, told CNBC that most of the region’s major central banks are not expected to raise rates anytime soon.
“The major central banks in the APAC region are in no rush to start raising their key rates … Darmet said in an email to CNBC on Tuesday, ahead of New Zealand’s lockdown announcement.