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The RBNZ “read the room” with a hawkish hold

Hamish Pepper web
Hamish Pepper | Posted on Aug 19, 2021
  • The RBNZ left the OCR unchanged yesterday given heightened health-related uncertainty.
  • But with the central bank’s inflation and employment objectives met, the Monetary Policy Committee has a strong desire to reduce stimulus once this uncertainty passes.
  • We agree that interest rates eventually need to be a lot higher, but health outcomes will determine when the tightening cycle begins. In fixed income portfolios we are positioned for the OCR to remain on hold while the COVID-19 delta variant outbreak unfolds, but for longer term yields to rise and inflation pressures to persist.


The Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged yesterday at 0.25% in light of the heightened health uncertainty. The Monetary Policy Committee, however, also noted confidence that rising capacity pressures will feed through into inflation, and that employment is at its maximum sustainable level. This confidence was reflected in an OCR forecast that showed hikes beginning earlier and reaching a higher point than the May projections. The OCR is now forecast to rise from Q4 this year and reach 2% by the end of 2023 (see below).

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We agree that interest rates eventually need to be a lot higher, but health outcomes will likely determine when the tightening cycle begins. We see two scenarios that frame a spectrum of possible outcomes:

  1. COVID cases are quickly identified, allowing community transmission to be eliminated and the economy to reopen before the 6 October Monetary Policy Review (MPR). The RBNZ is likely to feel comfortable starting the tightening cycle at this meeting. Financial markets currently assign a 60% chance of a 0.25% hike at the October MPR.
  2. COVID cases grow and necessitate an extended lockdown due to ongoing community transmission. In this case, the 24 November MPS is likely to be the earliest point at which the tightening cycle can begin. The delta variant is twice as contagious as the original COVID-19 variant and is particularly problematic in populations with low vaccination rates such as ours. Less than 20% of New Zealanders are fully vaccinated and only 30% have had one shot (see chart below). We think the recent situation in the Australian state of Victoria provides an example of the difficulties in containing the delta variant within a strict lockdown. Under this scenario the RBNZ could still justify rate hikes by pointing out that fiscal support is the best policy response to COVID. The timeframe that monetary policy references is longer, capturing an expectation that we see a quick recovery once lockdowns are eased.

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We think there is a high probability of lockdown extension and have positioned fixed income portfolios accordingly. Overall duration is slightly longer than benchmarks but concentrated in very short maturities (less than 1-year). We continue to be short duration in longer-dated maturities (more than 7 years) to reflect our view that global rates are likely to rise materially as the global economic expansion continues and the US Federal Reserve reduces QE asset purchases (for further discussion of our global outlook, see our latest Harbour Outlook).



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