RBNZ Refrains From Raising Rates

RBNZ MANDATE

The Reserve Bank of New Zealand (RBNZ) is responsible for formulating monetary policy, directed towards the economic objectives of achieving and maintaining stability in the general level of prices over the medium term and supporting maximum sustainable employment.

The employment mandate is a recent addition to the bank's economic objectives, as it was enacted in 2018 within the Reserve Bank of New Zealand (Monetary Policy) Amendment Act.

As of June 2020, the bank also changed the name of the Official Cash Rate (OCR) announcements to Monetary Policy Review (MPR), to reflect the fact that other tools such as forward guidance and asset purchases are deployed along with interest rates in order to achieve its mandate.

PANDEMIC RESPONSE

In order to mitigate the economic repercussions of COVID-19, the RBNZ cut interest rates by 75 basis points in March 2020 to a record low of 0.25%, and implemented a massive Large-Scale Asset Purchases (LSAP) program that eventually reached a target value of up to NZ$100 billion.

HAWKISH PATH

New Zealand had managed to contain the pandemic which had helped towards an economic recovery. Unemployment dropped to 4% during the second quarter of the year (compared to 4.6% in Q1), CPI Inflation jumped to 3.3% (y/y) in June and GDP grew 1.6% in Q1 (q/q).

These solid indicators have enabled the RBNZ to enter a hawkish path recently, halting additional asset purchases under the Large Scale Asset Purchase (LSAP) as of July 23rd, after NZ$53 billion worth of purchased bonds.

Back in May, it had sent the first hawkish signal, by projecting higher interest rates in the second half of 2022.

COVID-19 CURVEBALL

Going into Wednesday's meeting, the markets were expecting a rate hike, which would have made the RBNZ the first major central bank to go down this road - far ahead of its main peers.

On Tuesday however, the New Zealand government announced a 3-day nationwide Level 4 lockdown due to a handful of Covid-19 infections. This casted doubt over the timing of the central bank's next move and the overall path towards normalizing the ultra-loose monetary policies implemented in the wake of the pandemic.

LATEST DECSION

Following these developments, the Monetary Policy Committee blinked and did not pull the trigger on the official cash rate (OCR) at Wednesday's meeting, keeping the rate at 0.25%. The policy statement mentioned that the "decision was made in the context of the Government's imposition of Level 4 COVID restrictions on activity across New Zealand".

Despite their cautious stance, officials acknowledged that "Recent data for the New Zealand economy suggest demand is robust and the economic recovery has broadened" and expressed confidence of "meeting their inflation and employment remit with less need for the existing level of monetary stimulus".

More to it, the bank upgraded its interest rates projections, now seeing the OCR at 0.59% in December of the current year.

MARKET REACTION

NZD/USD dropped to new 2021 lows (0.6867) immediately after the bank refrained from raising rates, but then found support as the markets seemingly digested the banks upgraded forecasts of a faster rate hike path.