New Zealand Dollar's Lockdown Woes Continue as Fin Min Estimates NZ$1BN Hit to the Economy

- NZ counts economic cost of latest lockdowns
- NZD maintains laggard status
- RBNZ's Hawkesby is latest to signal negative interest rates ahead

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The cost of the latest round of New Zealand lockdowns is estimated to cost the economy NZ$1BN according to government estimates, a reminder of the significant drag the domestic picture poses for the New Zealand Dollar.

Finance Minister Grant Robertson on Tuesday said the Treasury estimates the two weeks of restrictions to contain the resurgence of Covid-19 caused a $1BN hit to the economy with each week costing $500 million.

New Zealand's Prime Minster Jacinda Ardern on Monday announced the latest lockdown would be extended from Wednesday to Sunday, and the risk of a further extension will only pile the pressure on the economy.

After all, covid-19 doesn't curtail economic growth, lockdowns do and New Zealand's "elimination strategy" is considered to be one of the most aggressive, if not the most aggressive, amongst the world's developed economies.

Economists at BNZ Bank say the move to Level 3 lockdown in the Auckland region, and a Level 2 lockdown across the rest of the country, will likely knock 1-2% off the country's GDP in the third quarter. The longer the lockdown extends, the greater the economic impact.

"This estimate will grow if the restrictions are extended. It is clear the government is still on an elimination rather than suppression strategy, which ultimately raises the question of whether the country will face ongoing lockdown restrictions over the next year or two. If that is the modus operandi then, economically speaking, this could potentially be quite damaging and is clearly NZD-negative, a possibility that needs to be priced in," says Jason Wong, Senior Markets Strategist at BNZ Bank in New Zealand.

The New Zealand Dollar is one of 2020's laggards which has upended the currency's traditional positive relationship with global stock markets and commodity market dynamics. The New Zealand Dollar appears to have broken with this relationship in 2020, failing to outperform alongside a strong recovery in global stock markets and commodity prices.

The cause of this shift is domestic in nature, as the Reserve Bank of New Zealand (RBNZ) has offered a particularly aggressive response to the economic slump caused by the covid-19 lockdowns, which has left New Zealand money markets looking particularly unattractive to international investors.

Christian Hawkesby, the RBNZ's Assistant Governor a said the RBNZ's balance sheet will continue to grow as it supports the economy, a reminder to the market that the central bank is intent on being one of the 'loosest' in the G10.

Hawkesby added the composition of balance sheet will become a more active tool for monetary policy decisions as the
implications of Covid-19 are not over, either globally or in NZ.

He warned the RBNZ was preparing to use other monetary policy tools if needed, preparing for the use of a negative OCR (the bank's interest rate) if needed.

The renewed lockdowns in New Zealand will encourage market expectations for the RBNZ to cut interest rates into negative territory in 2021, a development that is widely considered to be a negative for the New Zealand Dollar.

"We are now forecasting the RBNZ to cut the OCR by 50bp to -0.25% in April 2021. Beyond that, further easing is possible, but there are constraints on the OCR going below -0.75%," says Sharon Zollner, Chief Economist at ANZ Bank. "New Zealand with a closed border is an economy that is around 5% smaller. Because of the extreme seasonality of tourism, the blow will fall most heavily from October to March."

Zollner also says global growth "is looking dreadful".

"While people have to eat, they don’t necessarily have to fork out a bit extra for New Zealand’s premium, high-quality produce. Food supply disruptions globally are providing price support, but also logistical headaches. On the whole, New Zealand’s commodity prices are holding up pretty well, but downside risks are evident, and non-commodity exporters are finding the going very tough," says Zollner.