The Reserve Bank is likely to keep the Official Cash Rate on hold in the wake of new community cases of COVID-19, a leading bank says.
It comes after New Zealand plunged into level 4 lockdown at 11.59pm on Tuesday, following a new community case of COVID-19, the first case since confirmed to be the more infectious Delta variant. An additional four cases were confirmed on Wednesday morning, taking the total number of COVID-19 community cases to five.
Before Tuesday afternoon, economists widely expected the Reserve Bank to lift the Official Cash Rate (OCR) by 25 or 50 basis points, as part of its scheduled Monetary Policy Statement on Wednesday.
But a decision to lift the OCR is likely to be put on hold, ASB Bank says. In a release on Wednesday morning, ASB chief economist Nick Tuffley said given Tuesday's developments, the Reserve Bank is expected to "pause" on lifting the OCR until there's more certainty around the extent of the outbreak.
"A suspected community delta COVID case (and four infections linked to it so far) and the snap Level 4 lockdown mean the RBNZ is making a decision in the blind about the extent of the outbreak," Tuffley said.
He noted that given the COVID-19 developments, it made sense for the Reserve Bank to "hold fire" on pushing interest rates up while the Government puts out support to businesses.
"Right now, the Reserve Bank is having to make a decision in what is essentially a blind spot... it can't see the immediate future and know whether this [outbreak] is going to be short or long," Tuffley said.
However, capacity and rising inflation pressures in the economy are unlikely to go away. If it's a short lockdown, ASB expects the Reserve Bank to lift the OCR in October.
"That could involve a 25 basis point hike or even [a] 50 basis point hike at the following October 6 review - or even a 25bp hike ahead of the October meeting," Tuffley said.
If there's a prolonged lockdown, there would be less urgency to raise the OCR. Until more facts are known, the bank's assumption is that the OCR will increase three times, in October, November and February, each by 25 basis points.
Based on current information, it expects the OCR to reach 1.5 percent by the end of next year.
Brad Olsen, principal economist at Infometrics, also told Newshub given the uncertainty around COVID-19 alert level 4, the prudent action would be to "wait a breath" and hold off.
"The rationale for raising rates is certainly still there, but given the uncertainty that exists, now is not the time."
He expects the Reserve Bank to signal in Wednesday's announcement that tightening is coming. A cash rate rise could be timed before or at its October monetary policy review, once the country is out of higher COVID alert levels.
"Once we get out of alert level 4, the economy is still going to emerge with the same economic inflationary pressures that we had prior to this lockdown...intense labour market pressure, supply chain issues, higher inflationary activity, and a better employment scene," Olsen said.
The Reserve Bank Monetary Policy Review remains scheduled for Wednesday afternoon.