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Covid risk looms over OCR decisions

Editorial

Interest rates have bottomed out at record lows and, with the New Zealand economy showing signs of overheating, appear to be on the way up. The question is whether the Reserve Bank should move the official cash rate yet when the country remains largely unvaccinated and at risk of further Covid-19 outbreaks that would do their own throttling of the economy.

News from the RBNZ last week that it will stop its bond-buying programme using newly-printed money, capping it at $53 billion — well short of the up to $100bn by June 2022 that it committed to in March last year — was good news with regard to the country's economic resilience, and timely in removing this downward pressure on interest rates. It is also part of a global shift to dial back pandemic support that will hike the balance sheets of rich-world central banks by $US11.7 trillion (up 72 percent to $US28tn) over 2020-21.

Hot on the heels of the RBNZ removing this monetary stimulus came searing inflation data for the June quarter out on Friday, pushing the Consumer Price Index up to 3.3 percent for the year. Stats NZ said it was the biggest increase in nearly 10 years and was driven by higher prices for new housing and petrol (the 5.3 percent inflation peak in June 2011 included a 2.5 percentage point hike in GST).

Despite the RBNZ's monetary policy statement two days earlier forecasting inflation spikes for the June and September quarters, and attributing this to “factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs”, market pricing has shifted to suggest a 90 percent chance of it hiking the official cash rate (OCR) next month.

Westpac economists have forecast the OCR might go to 1.0 percent by November (it has sat at an all-time low of 0.25 percent since March last year). BNZ economists this week said the RBNZ might consider raising the OCR by 0.5 percentage points in one go, something it hasn't done since May 2000. However, their central forecast is for it to start with a 0.25 point rise at its August 18 statement, rising to 0.75 percent in November.

While it is risky to challenge this sort of consensus from bank economists, your editor is inclined to support the strong view of former NZ Herald economics editor Brian Fallow in his column last Friday, that the RBNZ “should not think of touching the official cash rate until the country is properly vaccinated”.