David Hargreaves says all the language is around further interest rate rises - but his crystal ball is looking very murky when it comes to our now Covid-hit economy

And so, the deliciously contradictory thing has happened. UP go the interest rates to cool the economy, even as said economy has one arm tied behind its back through big parts of the largest city being closed.

The common sentiment still (but perhaps wavering?) is that our economy can bounce back again from the latest Covid travails. 

Well, I've had my economic crystal ball out - and I reckon it's looking as murky as hell.

The RBNZ effectively promised ahead of time that it would raise the OCR from 0.25% to 0.50%, so, to not do so would have smashed its credibility around a bit.

But I expected the central bank to be more cautious on the prospect of future rises, however. At the moment the language is that the lights are green for future further rises.

I think too much is being based on what happened last year. This year IS different.

With Auckland now in some sort of twilight zone indefinite lockdown (but hey, you can see friends for a picnic), it is very difficult to get a handle on how the economy will perform over summer. We don't know at this stage what parts of the economy will be ALLOWED to perform.

And then there's the fact that Covid Delta WILL find its way out of Auckland and start seeding in other communities. People, I'm afraid this is going to spread. It magically drifted on the wind to Hamilton/Raglan. It will find its way to other places. 

I'm locked up in Auckland so don't have the best perspective on what's happening in the wider country, but it does seem disconcertingly as though the rest of NZ is not ready for Covid in the community. The retailers in the South carping about how they absolutely need to be back on Level 1 do need to wake up and get a strong whiff of coffee. They should also be aware that the Governnment is in the process of ditching the Level system - it's going to call it something else so the scope of its failings can be disguised. The start of that was the nonsensical Auckland 'steps' routine. 

But the point is, our economy is now going to be hobbled by Covid in the foreseeable future. 

And actually, I'm not sure the extent to which the RBNZ is factoring that in yet. It was still talking in reasonably upbeat terms that suggested the kind of bounce-back we got from the 2020 lockdown.

However, I sensed an almost schizophrenic mood in both the media statement and the report on the meeting of the RBNZ's Monetary Policy Committee. 

It was almost like there was a dawning "oh,oh" happening among the members. 

This paragraph in particular stood out for me:

"The Committee noted significant uncertainty about how changes to public health settings, border restrictions, and rising incidence of COVID-19 in the community will impact on economic outcomes as the response to the pandemic evolves."

Well, exactly. Our economy has roared back into life in the recent past because we haven't had Covid in the community. Now we do. And now all bets are off.

As I've said previously, one of the key things about our economy bouncing back so well after last year's lockdown was the fact that everybody could get out and about, shopping, eating, drinking, in the knowledge that Covid was not 'out there'. Now it is. And a lot of people will be less comfortable getting out and about - at least initially till they get their heads better around the idea that we now have the virus and that's that.

And of course, Auckland is still largely shut anyway.

With the global supply chain problems seemingly getting worse, and no signs of when they'll get fixed, pricing pressures are going to remain intense.

The chances of the dreaded 'stagflation' - rising prices, stagnant economy - are I think increasing by the month at the moment.

Which is why I do not think the RBNZ should be in a hurry to have us all prepared for the kind of string of rate rises the bank economists have been describing, and with an OCR of 1.5% by next year.

Now, yes of course, a setting of 0.25% for the OCR was an emergency one arrived at in March 2020 when 'the worst' was expected. But we shouldn't be too quick to assume that trouble is over. Because I don't think it is at all.

The RBNZ carries out its last review of interest rates for this year on November 24. This one will be accompanied by the full Monetary Policy Statement, in which the central bank will lay out its views of where we are sitting.

That's going to be an interesting read. And the folk at the RBNZ have got quite a job pulling everything together. 

There's further pressure on the November 24 decision because the next one is not till February 23, 2022. 

That's a very long time between drinks. A heck of a lot could change over the summer with Covid on the loose. 

I argued some years ago when the RBNZ extended the gap between OCR decisions at the end of the year that effectively three months was too long to wait between decisions - particularly if matters untoward were occurring.

Yes, of course the RBNZ can move the OCR between official decision dates - as indeed it did when slashing the OCR in March 2020. But, unless the sky really is falling in, it's not a great look.

Anyway, for now it's onwards and upwards with interest rates. That's the official word. But I for one will not be astonished if we see that change. 

This could be a summer of surprises. And not in a good way.