New Zealand delays rate hike as fresh COVID-19 outbreak stokes uncertainty

WELLINGTON (Reuters) -New Zealand’s central bank delayed raising rates on Wednesday as policymakers quickly changed gears after the country was put into a snap COVID-19 lockdown over a handful of new cases, but the bank still expects a hike before year-end.

The Reserve Bank of New Zealand left the official cash rate unchanged at a record low of 0.25% despite the economy running red-hot and a majority of analysts polled by Reuters last week expecting a hike.

Some had said Governor Adrian Orr may even deliver a 50 basis point rate hike here.

However, New Zealand’s first local COVID-19 infection in six months, reported on Tuesday, and a snap lockdown ordered for the entire nation hosed down those expectations and forced policymakers to confront the risk of a potentially premature move now.

“Today’s decision was made in the context of the government’s imposition of Level 4 COVID restrictions on activity across New Zealand,” RBNZ’s monetary policy committee said in a statement.

The New Zealand dollar initially dropped 0.7% to a nine-month low of $0.6862 following the announcement, before steadying to trade around $0.6923.

“The RBNZ took a wait-and-see stance following the new outbreak but it is maintaining forecast of a rate hike in the fourth quarter. It is just a pause for caution rather than a game changer,” said Yujiro Goto, chief fx strategist, Nomura Securities, Tokyo.

RATE HIKE STILL ON CARDS

The central bank said its least regretful policy stance is still to further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment.

RBNZ projections showed policymakers still expect to raise rates over coming months, with the cash rate seen at 0.50% by the end of the year, 1.5% by mid next year and over 2% by end of 2023.

A hike on Wednesday would have made New Zealand the first both in the Asia-Pacific and the G10 currency block to raise rates in the pandemic era.

While most developed economies are still holding off hiking, New Zealand’s successful COVID-19 elimination strategy has fired a hot economic recovery and stoked inflation.

However, New Zealand’s vaccination rate is low, leaving the nation of 5 million vulnerable – a fact underscored by the latest detection of the highly infectious Delta variant here has hobbled neighbouring Australia.

“The Reserve Bank was ready to pull the trigger, COVID comes along 24 hours earlier and so they’ve just pulled back on that,” said Jason Wong, senior market strategist at BNZ in Wellington.

“All the projections and signs on inflation and employment meet (conditions) to raise interest rates, it’s just that this uncertainty has come out of left field and delayed it.”

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