New Zealand Dollar Looks to Stabilise after RBNZ Says Rate Rise Delayed but Not Derailed

- NZD steadies after RBNZ prompts flash-in-pan loss
- OCR held “for now,” market turns to Oct for a hike
- New assumptions hint at 2.25% cash rate by 2024

Above: File image of RBNZ Governor Adrian Orr at a press conference. Image courtesy of RBNZ.

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The New Zealand Dollar slumped to new 2021 lows on Wednesday after the Reserve Bank of New Zealand left its cash rate unchanged for August, although losses were quick to reverse, potentially due to the RBNZ also indicating that a rate rise has merely been delayed rather than being derailed altogether.

New Zealand's cash rate was left steady at 0.25% in this month's RBNZ decision after the economy was dealt a setback Tuesday when Wellington announced a return to Alert Level 4 and all-out national 'lockdown' for one week in Auckland and three days for the remainder of the country after a coronavirus infection was discovered in Auckland.

"Today’s decision was made in the context of the Government’s imposition of Level 4 COVID restrictions on activity across New Zealand," the RBNZ said. "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."

Many in the market had expected the RBNZ to lift the cash rate to 0.50%, marking the first step in a likely multi-year process to reverse the monetary support provided to companies and households since coronavirus containment efforts first shuttered the global economy last year.

The eagerly anticipated 'tightening' cycle was expected to see the cash rate lifted as far as 1.5% in 2021 and 2022 before the coronavirus' reappearance in Auckland disrupted the RBNZ's plans and dealt a crushing blow to the Kiwi on Tuesday this week.

"We now expect hikes in October, November, February, May, and August next year, taking the OCR to 1.5% as before. However, our forecasts are also highly conditional on successful elimination of this outbreak," says Sharon Zollner, chief economist at ANZ.

Above: Pound-to-New Zealand Dollar rate shown at 4-hour intervals alongside NZD/USD.

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Kiwi Dollar losses have helped keep the Pound-to-New Zealand Dollar rate buoyant around the top end of its multi-month range thus far in the new week despite Sterling also being softer against other currencies.

“Obviously the Covid-winner-to-loser story playing out in Australia is a real concern for the Kiwis, and you cannot only have one case of Covid except by immaculate infection,” says Michael Every, a strategist at Rabobank.

What matters most for the RNBZ and Kiwi now is if Auckland's singular infection grows into something larger and more problematic, which could lead the government to pursue a longer 'lockdown' and may mean further delay for the bank.

But if this scenario can be avoided then Wednesday's Monetary Policy Statement assumptions suggest the RBNZ would likely start to lift the cash rate in October, which would still be quite some time before virtually all other major central banks with the exception of the Norges Bank in Norway.

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"The OCR track is steeper than the previous one published in May, the start date for tightening shifting from Q3 2022 to Q4 2021. That indicates 25bp hikes in each of October and November," says Imre Speizer, head of NZ strategy at Westpac. "Given the tightening cycle has merely been delayed, further dovish reactions are unlikely."

The RBNZ's latest assumptions also revealed the bank could eventually come to surpass market expectations in terms of the number of interest rate rises, as well as the overall level of its cash rate by the end of the coming cycle, if the economy develops as anticipated in the years ahead.

"Hikes are the base case if we get through this current scare. As such, we see limited scope for interest rates to fall much further now that they have digested the surprise of this week’s Delta outbreak and today’s pause. The same goes for the NZD –which is, quite rightly, treating today’s decision as a postponement rather than a cancellation," says David Croy, an ANZ colleague of Zollner.

New assumptions envisage a cash rate that rises to 2.25% by 2024, after also still reaching 1.5% by the end of next year.

Above: Pound-to-New Zealand Dollar rate shown at daily intervals alongside NZD/USD.

New Zealand’s economy can depend in the short-term on a wage subsidy scheme and "resurgence support payment" announced by Finance Minister Grant Robertson on Tuesday as a means of mitigating business closures.

But the longer the shutdown goes on, the more the risk of lasting damage to the economy grows and the greater chance there is of the RBNZ being compelled to further delay its interest rate normalisation cycle.

All of this means the government’s daily announcements of testing statistics could now get much more attention from the Kiwi, and especially in light of recent developments over in Australia where areas accounting for more than half the country’s economy are facing weeks more under lock and key.

“Like the NZD, bulls are no longer betting on the Reserve Bank of Australia’s taper in September to boost the AUD. Extended lockdowns to contain the persistent rise in Covid-19 infections have heightened expectations of a double-dip recession,” says Philip Wee, a strategist at DBS Group Research, who forecasts an AUD/USD rate of 0.70 by year-end and further losses for NZD/USD.

“As of 10 August, only 17.6% of the NZ population were fully vaccinated. Since mid-June, NZD traded in a lower 0.69-0.71 range vs 0.71-0.73 in the previous two months. We now forecast NZD moving lower towards 0.65 in the next 6-8 months,” Wee warns.