The RBNZ’s message to financial markets was that, 'yes – interest rates do need to go up, but how high remains uncertain so don’t get too far ahead of yourselves', ASB economists say

The emergence of the new Omicron Covid variant has reinforced the Reserve Bank's "considered steps" approach to interest rates, ASB economists say.

In ASB's latest Economic Weekly, senior economist Jane Turner says that by raising the Official Cash rate 25 basis points to 0.75% last week, rather than lifting it by 50 basis points our central bank was giving a message to financial markets.

"The RBNZ’s message to financial markets was that, yes – interest rates do need to go up, but how high remains uncertain so don’t get too far ahead of yourselves.

"...Indeed, a new vaccine resistant Covid-19 variant really would materially hamper the recovery for the NZ and global economy next year," Turner said.

In terms of domestic considerations, Turner said the RBNZ was wary of how much mortgage rates had already lifted, and that even though the economy has been strong over 2021 it was "mindful of the number of headwinds facing households over 2022".

"Higher interest rates and the rising cost of living outstripping wage increases could have quite the cooling effect on spending.  This could be potentially compounded by wealthier NZ households redirecting money away from domestic tourism and retail spending to international travel instead. 

"Furthermore, credit conditions are tightening beyond just the lift in mortgage rates – tighter Loan to Value Ratio restrictions are just kicking in, along with some banks beginning to impose debt-to-income lending limits." 

Meanwhile though, the speed with which travel restrictions and border closures were put in place internationally over the weekend was also a timely reminder that international travel in 2022 won’t be in anyway ‘normal’. 

"With NZ set to allow home isolation for fully-vaccinated citizens and residents from early next year, many are likely to be eying up an international trip. 

"However, the lessons from Omicron (and the bursting of the TransTasman Bubble) are that international borders and quarantine requirements can be altered with little to no notice. 

"People looking to travel overseas need to be prepared with a contingency plan and ready to fly home at a moment’s notice (or risk becoming stuck for a prolonged and unknown period as is the case for those who remained in Australia).  This also highlights the challenges and risks of opening up for international tourism over 2022."

Turner said it remained too soon to know the degree of threat the new Omicron variant will pose to the management of the pandemic.

"...But it is a timely reminder that the pandemic is far from over and many uncertainties and risks remain."