It hasn't happened yet, but it is already feeling somewhat ironic.
On Wednesday, October 6, the Reserve Bank will almost certainly raise interest rates.
It will do this to dampen the prospect of an overheating economy, even as the largest city in that economy is likely to be still severely hobbled by Covid lockdown restrictions. (Auckland will either JUST be emerging from Level 3, or indeed it could still well be there at that time.)
That's right, the RBNZ will be looking to cool an economy - of which large parts have been shut for weeks.
We live in interesting times alright.
It is to be presumed that the RBNZ will say that fundamentally nothing has changed since August, when it was all set to hike rates only to be rudely interrupted by the first confirmed case of this Covid outbreak in Auckland on August 17, the day before the RBNZ's decision.
The Official Cash Rate has been at an emergency setting of just 0.25% since March 2020 when the pandemic was getting up and running in a serious way. So, 'normalisation' has to happen at some point.
And until August 17 it was all pretty clear what the RBNZ could and should do regarding a steady cycle of interest rate rises that would see the OCR climb back to 1% (where it was till March 2020) and probably above - all within the next year or so.
The wild card was always what would happen in the event of a Covid Delta outbreak.
While the RBNZ will, I think correctly, justify an OCR rise to 0.5% on October 6, the reality is things HAVE changed in an enduring way since August 17.
Monday's announced move down in alert settings for Auckland to 'Level Takeaways' is, I think, the beginning of the Government's acceptance that it won't be able to this time stop community transmission of the virus.
I think we've got it now, and we will have to work around how we deal with that. This is the decision the Government was hoping to make next year, but is now going to have forced upon it. The hard focus from the Government, certainly in the next two weeks, is going to be to get the numbers of vaccinated as high as possible. And this was very clear from Prime Minister Jacinda Ardern's Covid media briefing at the Beehive on Tuesday. That's going to be the mantra for the next two weeks.
If the Government is able to meet some sort of targeted level - and at the moment the target is 90% at least one jab for Aucklanders - over the next couple of weeks it will be able to put a more brave face on the looming end of the elimination strategy.
But the fact we are almost certainly now in the situation of having to deal with Covid in the community does change a lot of things - and it makes the RBNZ's already hard job even more difficult.
Singapore has a somewhat bigger population than NZ. It has 5.9 million to our 5.1 million. Over 80% of its population aged over 12 (nearly 4.5 million people) are FULLY vaccinated. And in recent days Singapore has been averaging around 1000 new Covid cases every day.
That gives some idea of the level of disruption we can still expect even if we achieve what's seen as a 'high' number of vaccinated people.
So, having the virus in our community is going to make a difference.
One of the key factors in our economy bouncing back so strongly from lockdown last year was the fact we did eliminate the virus. People could feel confident getting out and about - and spending - in such an environment. This time is going to be different.
Does it mean that at least some people will be more reticent, at least initially about getting out and about and going to restaurants, and pubs and using public transport, for example?
The UK, which has had a truly brutalising experience at the hands of the virus, is now to all intents and purposes 'open' again - but people have been very reluctant to go back, for example, to using public transport.
And surely it will have some impact on our populace to know now when we go out that 'it' is 'out there'.
Yes, we will learn to deal with it, and we were always going to need to at some stage - but as the rest of the world is showing, the disruptions don't go away simply because you have an impressive-looking vaccination number.
All of which means the kind of 'straight-line' assumptions that could be and were being made about the path of interest rates over the next year (IE just all up) are no longer necessarily valid.
It is eminently possible our economy does not bounce back as energetically this time.
Okay, so, you might say if there isn't that 'bounce' then no problem, the RBNZ can just hold fire after perhaps the first hike.
One thing that hasn't changed though is that the global supply chain problems - that central banks were hoping would be a passing fancy - are now looking likely to linger much longer than anybody hoped. Couple that with NZ's tight labour market (and current difficulty in bringing in imported labour) and inflation pressures look set to remain intense.
I think the new environment (with community Covid) we are now facing definitely opens up the possibility that economic growth could become sluggish even as prices keep going up.
All this just means is that the headache for the RBNZ as it helps to navigate the economy through the pandemic is even bigger.
I now think therefore there's every chance that the RBNZ will over the course of the next 12-24 months be forced to pause and maybe even reverse track with the OCR before moving definitively to more 'normal' settings.
As ever, much will really depend on how quickly some sort of return to a post-Covid new 'normal' can be achieved and therefore disruptions such as those to the global supply chain can be smoothed out.
For now though the immediate outlook appears decidedly bumpy.
46 Comments
This morning my work abandoned plans to get us back into the Wellington office until level 1.
No one wants to keep moving all the hardware back and forth, and it seems we're all expecting to be back to level 3 in Wellington after yesterdays announcement.
Orr will probably get his wish.
I think there will always an excuse to not raise rates but lets face it, I hardly leave the house and the price of it keeps roaring up so its time to bite the bullet and hike rates. If its not Covid, it's China and next it will be Climate change the list goes on but inflation is still only going one way regardless.
Look at the price of finished steel product. There's your inflation, the Chinese are turning off their blast furnaces to meet emissions and air quality guidelines:
https://fred.stlouisfed.org/series/WPU101707
It's a brave new world where the Chinese aren't doing the dirty work. They've also started to export emissions.
I wish the govt would stop being so tight, so slow and so woke.
The Queensland govt is building a large MIQ near a private airport for the purpose of long term quarantine and that is what we should be doing as well. The stop gap solution of inner city hotels cannot work in the long term.
The authorities should be going door to door with saliva testing kits testing everyone in each household to eliminate the Covid carrying residue of people that are holding everything up for everyone else.
The only reason this isn't being done is because Labour needs the votes in those suburbs.
Letting gang members out with family members doing the transporting in a time of pandemic is just plain wrong.
The neoliberals cannot get back to business as usual with letting monetary policy doing all the heavy lifting and open borders ensuring a supply of low paid labour unless they are willing to spend money on purpose built quarantine facilities, state housing loans for low income people and support for R & D for new industry. The slowness of this govt tells me that they are not willing or able to do it.
The old laissez-faire model is actually broken. Worldwide low interest rates are a symptom of this.
Why would you increase interest rates at such a vulnerable time? Desperation for the old days is why.
The govt must bite the bullet and spend the money to adapt. We were given a respite with our Covid free days, and we didn't use that respite productively.
It's time to build the new structures needed to live in this new reality.
Yes yes yes. Set a vaccine "Date", not a percentage.
You have until November 30 2021 to get Vaccinated, then we abolish all levels and open all borders.
If you dont want to get vaccinated, that is fine, you are not allowed into hospital.
As the unvaccinated die off, the pecentage of vaccinated will naturally increase, that is what you call a win win situation.
Natural selection in action.
And you avoid the moaning and complaining and marching from the non vaccinated conspiracy theorists.
Agree.
The thing is, we may love to hate the Aussies, but on certain things they are superior to us.
One obvious example is they are much better, generally, at 'getting things done'. And this is partly because of our heavy adoption of neo-liberal world view, which is often about 'just in time' delivery rather than planning and building redundancy and contingency in to out systems and infrastructure.
We should have had planning, if not building, purpose built MIQ facilities well underway.
Use some brains as well as initiative. Now let's see, what other crisis do we have in addition to covid? Oh that's right, housing!
In the future the facilities can be used as emergency housing. Or used again in the future when (not 'if') another pandemic strikes.
Not rocket science is it????????????
Our 'she'll be right' attitude mixed with out neo-liberal dominated word view is a real problem for this country.
For decades NZ was far superior to Australia in just about everything. Then, around the 1980s and 1990s, there was a rare unholy alliance between National and the Roger Douglas influenced Labour Party to wipe out every last trace of what had been the highly productive and innovative Ministry of Works. The almost immediate result was the Leaky Homes fiasco. Say no more.
Hello David,
Can you please explain how referencing Singapore to New Zealand when talking about Covid spread is relevant?
It seems to me that writers consistently pick any country of a similar population and reference that with what is likely to happen in NZ. I say nonsense given we all understand how Covid spreads. Other critical factors never mentioned are our absence of land borders and of course NZ having no regional governments which means one strategy can be implemented.
So in your article I would say comparing Singapore: population density 8358 people per sq km, with Auckland 1210 people per sq km, or New Zealand 18 people per sq km, is nuts.
I'm no scientist of course.
The Official Cash Rate has been at an emergency setting of just 0.25% since March 2020 when the pandemic was getting up and running in a serious way. So, 'normalisation' has to happen at some point.
Alan Bollard, Governor of the RBNZ 2002-12 claimed a 3.5% OCR was an emergency setting. The trajectory is always towards the zero lower bound as a hard boundary until it isn't. Witness Europe.
David, I think this is a very pertinent article, I especially like your following paragraph:
"One of the key factors in our economy bouncing back so strongly from lockdown last year was the fact we did eliminate the virus. People could feel confident getting out and about - and spending - in such an environment. This time is going to be different"
I think few people, including economists, understand this
Certain spending like food, petrol etc. would not be avoidable. Doesn't matter how situation changes, those essential items would be always in high demand, this is going to push up the inflation under current pandemic settings. Low interest rate works well for economy due to globalisation, But when pandemic is happening while supply chains are getting disrupted, would we still be able to keep interest rate low? I am not too sure about it.
"All this just means is that the headache for the RBNZ as it helps to navigate the economy through the pandemic is even bigger."
Oh No, RBNZ. Please don't try and navigate us anymore. You have done more than enough. Just let the price of money float and quit your jobs. We will be much better off without Monetary Policy and your decades of stupid top down stimulus idiocy. Please just piss off.
David, I agree with you that the announcement of Auckland going to Level 3 is the “beginning of the Government's acceptance that it won't be able to this time stop community transmission of the virus.”
The government should have prepared the country for a suppression strategy but has failed miserably because the health system has one of the worst levels of preparedness in the OECD for; icu nursing levels, rapid testing capability, Covid vaccination levels & preparedness for booster shots. The government now needs to take responsibility for this failure which is now likely to result in many more deaths than would otherwise have been the case if actions had been taken to get us above the average in the OECD.
How can you contemplate eliminating the virus when an additional 300,000 Aucklanders will go to work tomorrow. Covid has an incubation period ranging from 1-14 days & many cases are asymptomatic so by going to Level 3 there is now only a small chance it will be eliminated.
The government now has a strategy based on hope, rather than being proactive & preparing the country’s health system to cope with a suppression strategy & ordering more vaccines, including Moderna.
Other countries like UK are now far better prepared with 95% of the population having antibodies either from vaccinations or previous infections & their health system is now far better prepared than ours. We should be learning off them with their levels of icu / 100,000 population, vaccination levels and rapid testing capability.
How many deaths will NZ have if it reaches NSW’s level of cases? Far more than NSW because they have a far greater level of surge capacity for their icu’s and have a far greater supply of drugs needed to fight Covid.
It's not going up anytime soon, never was. They will wait until the last minute when it's too late and the only way to deal with the mountain of global debt is to wish it away with inflation or a debt reset/forgiveness to maintain social order. Once the big players start hiking so will we, in the meantime get ready to be asset rich cash broke. Beans on toast are fortunately good grub.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.