coronavirus

New Zealand Was Set to Be the First Advanced Economy to Hike Rates. One Covid Case Put a Stop to It

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  • New Zealand has been among the most successful in the world to keep their Covid cases in check with tough lockdowns and shutting of its borders.
  • Analysts widely expected the country's central bank to hike rates.
  • But the discovery of one Covid case derailed that path, with the central bank saying on Wednesday that it put rates on hold in "the context" of the nationwide lockdown announced on Tuesday.

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 one Covid case led the country to announce a nationwide lockdown a day earlier.

The Reserve Bank of New Zealand said in a statement the decision to hold rates at 0.25% was made "in the context of the Government's imposition of Level 4 COVID restrictions on activity across New Zealand."

On Tuesday, Prime Minister Jacinda Ardern imposed a nationwide lockdown when the first Covid case in six months was discovered in Auckland, the country's largest city.

The city will be under lockdown for seven days starting Wednesday, while the rest of the nation will observe a three-day lockdown. Level 4 restrictions are the highest in the country and the most restrictive, where people must stay home and can only leave only for essential services.

'Knife-edge situation'

As of Wednesday morning, the number of cases detected had risen to seven and were 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 touch and go knife-edge situation."

"This morning ...we find that it's delta (variant), and, you know, at that point 24 hours ago, the market was thinking that the RBNZ wouldn't just deliver 20 but 25 (basis points)," he told CNBC's "Street Signs Asia."

Before Wednesday's rate decision, Michael Gordon, acting chief economist for New Zealand at Australian bank Westpac, said he did not expect a rate increase.

"The key here is that the Government cannot be confident about the scope of the (Covid) problem," he said in a note on Tuesday, after Ardern's lockdown decision.

Analysts mostly expected the central bank 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 cash rate by 25 basis points from a record low to 0.50%.

Most central banks globally have slashed rates to record lows in a bid to prop up their pandemic-hit economies. Governments around the world have been injecting stimulus into their economies to support businesses. 

But New Zealand has been among the most successful in the world to keep their Covid cases in check with tough lockdowns and shutting of its borders.

Due in part to its zero-Covid strategy, the number of Covid cases has so far been kept at about 2,500 cases, including 26 deaths — among the lowest in the world.

That's helped the economy to bounce back, with data showing first-quarter economic growth this year was above expectations. It was mainly driven by strong retail spending, falling jobless rate, and soaring housing prices.

The combination of minimal Covid restrictions and generous stimulus has led to a booming economy and rising inflation, leading analysts to expect higher interest rates.

NZ dollar drops

The New Zealand dollar fell to 0.6944 against the U.S. dollar on Wednesday.

The currency has been falling since the lockdown announcement on Tuesday, from above the 0.70 level to above 0.69.

Bloxham said the New Zealand dollar could recover once the Covid situation is contained.

"If (the lockdown) is sufficient to get the virus contained, to keep the numbers small and push it right back to zero ... then you'd imagine in a few weeks time ... the economy's back on track and likewise there'd be sort of upside to the New Zealand dollar," he told CNBC's "Street Signs Asia."

New Zealand still likely to hike rates

With the expected hike now derailed, analysts said it would now depend on the scale of the virus situation.

"Regardless of the economic case for higher 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," Gordon of Westpac said.

He said that experience showed economic activity tends to bounce back once restrictions were lifted. "When that happens, the RBNZ will be left facing many of the same issues as before: an economy that is running up against cost pressures and capacity constraints, with risks that inflation could become more persistent," he said, adding that hikes will still be needed.

Meanwhile, Maxime Darmet, Asia-Pacific director of economics at Fitch Ratings told CNBC that most major central banks in the region are not likely to raise rates soon.

"Major central banks in the APAC region are in no rush to start hiking policy rates ... with the exception of New Zealand and Korea. Generally contained inflationary pressures and Covid-related economic setbacks leave APAC central banks willing to keep policy loose," Darmet said in an email to CNBC on Tuesday, before New Zealand's lockdown was announced.

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