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RBNZ Meeting: What Happened?

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Last night, the RBNZ decided to leave the OCR at its current level. But, by then, most of the market reaction had already happened.

The situation in New Zealand is a microcosmos of what the “new normal” in the markets is, and the difficulties of forecasting central bank policy.

Up until yesterday, there was a near-unanimous consensus that the RBNZ would raise rates by 0.25%. New Zealand has had one of the better economic recoveries of the OECD, and the housing market was starting to be an issue. Money markets had adjusted accordingly, as the path forward for the Kiwi seemed pretty certain.

So what happened?

The major shift

Then the news reported that one person had contracted covid-19 without any connection to foreign travel. That would be the first case of community transmission in months.

This set off alarm bells in the markets, as New Zealand is notoriously strict on dealing with covid, despite having a high percentage of vaccination.

As the Kiwi dollar started to slide, PM Ardern would give a press conference. That all but confirmed that new lockdowns would ensure. And so the markets adjusted to a new reality that the RBNZ wouldn’t cut rates this time around.

The policy situation

The RBNZ last month suspended their bond-buying program, as they moved to tighten policy since experts assumed that New Zealand had largely recovered.

Nonetheless, the reserve bank has a delicate issue to deal with. And that is balancing an overheating housing sector against an underperforming tourism sector.

Despite the domestic economy going back to normal (up until yesterday), the lack of vaccination around the world means that the tourism industry is still under pressure.

The previous optimism from the travel bubble with Australia has been dashed following increased cases across the Tasman Sea. Tourism represents the third-largest source of foreign cash flow and is an important factor in the exchange rate.

Where we go from here

Reports surfaced yesterday that RBNZ staff were rewriting the monetary policy statement even before the meeting.

This suggests that the reserve bank was pretty confident they were going to raise rates but delayed them because of the lockdowns. That said, the new covid restrictions are relatively short, and we could see a potential resolution before the next meeting.

So, the RBNZ remains on track with its tightening policy. In fact, they also communicated that with hawkish rhetoric in the policy statement.

However, we can’t be sure of how the outbreak in New Zealand will evolve.

Just this morning, Health Authorities reported another three cases of community spread and said they expected up to 100 domestic cases over the coming days.

The worry then could be extended lockdowns, as New Zealand is unlikely to lift restrictions until the community spread issue is resolved.

The next RBNZ meeting is in mid-October. Money markets are still pricing in a rate hike by then, banking on the covid situation coming under control in the next couple of months.

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