Liam Dann: What will this week’s lockdown mean for interest rates?

What will the latest lockdown mean for the Reserve Bank’s interest rate outlook?

It’s a simple enough question but the answer is subtle.

That’s because, as much as it causes serious pain for many businesses, a three-day lockdown doesn’t really shift the dial on the country’s macro-economic outlook.

For the record, we’ll find out exactly what the Reserve Bank is thinking next Wednesday at 2pm when Governor Adrian Orr delivers his first Monetary Policy Statement (MPS) of the year.

The RBNZ isn’t expected to move the official cash rate in either direction – regardless of this week’s community cases.

This lockdown barely warrants a mention in the MPS previews which economists have written since it was announced.

But that doesn’t mean the lockdown won’t have a bearing on the RBNZ’s message.

In fact it seems likely to play to its advantage given the mounting pressure it is facing to soften its stance and pull back on stimulus as the economy improves.

The Reserve Bank’s low interest settings have been blamed for the nation’s red-hot housing market.

Orr accepts that they do cause asset price inflation.

But he has also been open and steadfast – since the beginning of the pandemic – aboutRBNZ policy being to follow “the path of least regrets”.

In other words, the consequences of doing too little outweigh the consequences of not doing enough – the latter implying a prolonged recession and persistently high unemployment.

The RBNZ’s monetary policy stimulus, in tandem with the Government’s fiscal support, have seen New Zealand avoid those things – so far.

The stronger economic good news since the last RBNZ statement – higher inflation, lower unemployment, greater business and consumer confidence – will dominate any shift in tone for this MPS.

The Bank’s forecasts will have to be upgraded in light of the country’s strong rebound late last year.

Markets have assumed this and started pricing in rate hikes for as early as the end of this year.

The Reserve Bank will likely want to push back against this view in its messaging while still keeping its options open.

It will be cautious about the risk of celebrating success too soon and being caught out by the sting in the tail of this crisis.

Even if things go well from here, borders may still be closed for a long time.

The normally upbeat Westpac economics team this week warned that the closed borders during the summer tourist season will likely see the economy slow into a technical recession in the first half of this year.

They don’t see the official cash rate rising until early 2024.

So what this lockdown will do for the Reserve Bank is serve as a timely reminder that we are not out of this crisis yet – not by a long shot.

There is still time, before the population is fully vaccinated, for the virus to wreak havoc with the economy.

As ASB chief economist Nick Tuffley says, we should expect the Monetary Policy Statement to understate the upside and accentuate the downside.

“Expect a message of not counting your chickens before they hatch, that monetary policy needs to remain stimulatory for some time, and that the RBNZ will remain prepared to provide additional support if necessary,” he says.

Essentially, this latest lockdown needs to be viewed in the context of the growing debate around inflation risk.

Around the world economists are projecting out to the pandemic recovery. They are worried that as the world comes out of lockdowns there will be a huge rebound in spending.

Combined with all the central bank and government stimulus they fear an inflation surge – something the world hasn’t seen for a generation.

They are right to do worry.

Debt levels are much higher now.

It is a realistic risk – one that has the potential to crash overheated equity markets and worse, (for New Zealand at least) the housing market.

But it remains a hypothetical risk.

Inflation in this country is still below the Reserve Bank’s mid-point target of 2 per cent (it’s currently 1.4 per cent).

Unemployment at 4.9 per cent is certainly better that anyone expected at this point.

But it’s likely to be volatile for some time.

Policy makers have to deal with what is in front of them.

Ultimately this lockdown shouldn’t be material to New Zealand’s long-term interest rate track.

But at the margins, if it dampens market enthusiasm and makes it easier for the Reserve Bank to hold its nerve, it might push out the time frame for rate hikes.

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