Highlights of the August 18, 2021 RBNZ meeting
- Prior was 0.25%
- A change would have been the first since March 16, when the OCR was cut to 0.25% from 1.00%
- The OIS market was pricing in a 60% chance of a hike but that's been highly volatile since a covid case was announced at this time yesterday
- NZD was trading at 0.6942 ahead of the decision
Highlights of the statement:
- Decision was made in the context of the Government's imposition of Level 4 COVID restrictions on activity across New Zealand
- The need to reinstate COVID-19 containment measures in some regions highlights the serious health and economic risks posed by the virus
- Recent data for the New Zealand economy suggest demand is robust and the economic recovery has broadened
- Capacity pressures are now evident in the economy
- the Committee remains alert to the supply disruptions that COVID-19 can create, and the dampening effect this can have on confidence
- Assessments on inflation and employment will be ongoing with a view to continue to reduce the level of monetary stimulus over time so as to best meet their policy remit
- Says 'least regrets' stance is to hike rates but agreed to keep rates unchanged at current meeting due to lockdown
- Full text
- Sees OCR at 0.59% in December vs 0.25% previously
- Sees it at 1.38% in Sept 2022 vs 0.49% prior
- Sees annual CPI 2.2% by Sept 2022 vs 1.6% prior
The New Zealand dollar instantly fell to 0.6869 on the decision but has bounced to 0.6892, perhaps owing to the forecast for the OCR at 0.59% in December -- implying that a hike and perhaps more is still in play.
The cautionary note on housing is new and that's certainly a red flag that could weight further on NZD, which broke through the July lows to the worst level since November on the decision.
The OIS market probability of a hike at the next meeting on October 6 has now fallen to just 40%.
Will other central banks -- particularly the Fed -- follow the RBNZ's lead and press the pause button while the evaluate the impacts of delta and rising global cases?
Full text of the decision:
The Monetary Policy Committee agreed to retain the current stimulatory level of monetary settings, keeping the Official Cash Rate (OCR) at 0.25 per cent for now. Today's decision was made in the context of the Government's imposition of Level 4 COVID restrictions on activity across New Zealand.
The Committee will assess the inflation and employment outlook on an ongoing basis, with a view to continue to reduce the level of monetary stimulus over time so as to best meet their policy remit. This follows the recent halting of additional government bond purchases under the Large Scale Asset Purchase (LSAP) programme in July.
Global monetary and fiscal settings remain at accommodative levels, supporting international spending and investment. Rising vaccination rates across many countries have provided economic impetus. The rise in activity has continued to support demand and prices for New Zealand's export commodities.
However, the need to reinstate COVID-19 containment measures in some regions highlights the serious health and economic risks posed by the virus. Persistent and elevated health risks are promoting ongoing global supply chain disruptions, and are acting to constrain productive capacity and prolong inflationary pressures. Today's re-introduction of Level 4 restrictions to activity across New Zealand is a stark example of how unpredictable and disruptive the virus is proving to be.
The Committee noted that the New Zealand economy had rebounded more strongly than most countries, with less domestic disruption caused by COVID-19 to date. Employment is currently at or above its maximum sustainable level, and consumer price inflation expectations remain anchored near 2 percent, the midpoint of the target range.
Recent data for the New Zealand economy suggest demand is robust and the economic recovery has broadened, despite some weakness persisting in the sectors most exposed to international tourism. Household spending and construction activity are at high levels and continue to grow, and business investment is responding to increased demand.
Capacity pressures are now evident in the economy, particularly in the labour market where job vacancies remain high despite the recent decline in unemployment and underemployment. Wages are rising consistent with the tight labour market conditions.
Broader inflation pressures are being accentuated in the near-term by one-off price rises such as higher oil prices, and temporary factors such as supply shortfalls and higher transport costs. Near-term consumer price inflation is expected to rise above the Committee's target range before returning towards the 2 percent midpoint around mid-2022.
The Committee agreed they are confident of meeting their inflation and employment remit with less need for the existing level of monetary stimulus. However, the Committee remains alert to the supply disruptions that COVID-19 can create, and the dampening effect this can have on confidence. House prices are also above their sustainable level, heightening the risk of a price correction as supply increases.
The Committee agreed that their least regrets policy stance is to further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment. They agreed, however, to keep the OCR unchanged at this meeting given the heightened uncertainty with the country in a lockdown.
We're going to have to wait a bit longer for the first developed-market central bank rate hike in this cycle.
