by Stephen Wright
WELLINGTON, New Zealand – The new COVID-19 version that destabilizes financial markets will require a dramatic economic impact to prevent the Reserve Bank of New Zealand from continuing to hike interest rates, its chief economist Yoong Ha said on Monday.
New Zealand’s central bank raised its cash rate for the second time in two months last week, as it rolled back the pandemic stimulus that has pushed consumer-price inflation to its highest point since 2010.
A day after the RBNZ’s rate decision of 24 November, South Africa raised the alarm about a new apparently rapidly spreading Covid-19 variant, now known as Omicron, which has alarmed health experts. and has given rise to volatility in stocks, market interest rates and currencies.
But Mr. Ha told The Wall Street Journal that the RBNZ would have raised the cash rate even if Omicron had become known prior to the central bank’s policy statement.
He said the situation now is different from August, when RBNZ delayed the rate hike due to the delta variant outbreak, which was followed by zero Covid-19 cases for months. A lengthy lockdown in New Zealand’s largest city, Auckland, failed to stamp out the virus and the government put it on hold on its strategy to eliminate the virus.
“The difference is that we are now transitioning to a new COVID safety framework,” said Mr Ha, referring to the New Zealand government’s traffic-light system for managing the spread of COVID-19.
“It means we’re getting used to the idea of living with COVID, so O’Micron, I don’t think it changes the outlook, it probably reinforces the downside risks we see in the projections,” he said.
Mr Ha said the new COVID-19 version could have economic consequences, a demand reshuffle rather than a dramatic effect. He said the RBNZ would be in a better position to assess the economic impacts of the version in its next monetary policy statement in February.
“If Omicron proves to be a big game changer, it could be like August, where we just took a break,” said Mr. Ha.
“Who knows how this thing might play out, but from where we sit, we see a very measured path to higher interest rates over the next 12 to 18 months,” he said.
RBNZ raised its cash rate from 0.5% to 0.75% last week. It raised its projection for the final peak in cash rate to 2.6% by the fourth quarter of 2023, compared to 2.1% in early 2024 in its previous forecasts.
New Zealand’s consumer prices rose 4.9% in the third quarter from a year earlier – above the RBNZ’s 1.0%-3.0% target – due to pandemic stimulus stemming from the country’s closed borders and rising demand due to labor shortages.
Write to Stephen Wright at [email protected]