How Are Interest Rate Expectations Taking Shape In The NZ Economy?

Tuesday, 28 September 2021, 7:04 am
Press Release: Kalkine

Summary

• Record-low interest rates have been holding firm ground amid growing concerns around the pandemic for more than a year now.
• Low-interest rates primarily spurred buying activity in the property sector, giving upside momentum to the economy.
• The remarkable economic growth data has seen market experts rachet up odds of an interest rate hike as soon as next month.

Since the onset of the COVID-19 pandemic, the New Zealand economy has been experiencing some notable changes while reviving from the contractionary to expansionary phase. Despite the changing dynamics of the economy, record-low interest rates have been holding strong ground for more than a year now. A part of the credit goes to the rapid spread of the Delta variant over the past few months, preventing a surge in interest rates. However, the central bank’s monetary policy review meeting due next month has again sparked discussions around an interest rate hike in Kiwiland.

The COVID-19 pandemic saw New Zealand and other advanced countries immediately embracing interest rate cuts to prevent an economic downturn. In fact, low-interest rates turned out to be a saving grace for the country amid pandemic-induced challenges while working in tandem with some quantitative easing programs. Low-interest rates primarily spurred buying activity in the property sector, giving upside momentum to the economy.

At a time when the New Zealand economy is slowly recouping to its pre-pandemic phase, speculations of interest rate hikes are rife in the market. However, it is yet to be seen how soon the central bank raises its interest rate amid the ongoing concerns around the Delta variant.

GDP Data Supporting a Rate Hike Call

New Zealand observed a better-than-expected economic growth in the June 2021 quarter despite the virus crisis. The country recorded a GDP growth of 2.8 per cent during the last quarter, which was double the rate of economic growth seen in the March quarter. Economists were anticipating the GDP to surge by 1.1 per cent in the June quarter.

Related Read: NZ GDP beats all forecasts, grows 2.8% in June quarter

The remarkable economic growth data has seen market experts rachet up odds of an interest rate hike as soon as next month. Initially, the markets expected the Reserve Bank of New Zealand (RBNZ) to increase rates by 25 basis points in August. However, the RBNZ refrained from increasing interest rates last month, keeping the cash rate steady at 0.25 per cent. The decision came amid severe lockdown restrictions against the Delta variant and sheer uncertainty for industries and businesses of how long the economy will be constrained.

Interestingly, the coronavirus case numbers have stabilised at lower levels over recent days, and economic revival signs are also apparent in the June quarter GDP numbers and some other economic indicators. This may prompt the central bank to embrace contractionary monetary policy next month despite lingering concerns around vaccinations and lockdowns.

RBNZ’s Stance on Rate Hike

Some economists continue to believe that the central bank will lift the Official Cash Rate by 50 basis points next month instead of 25 basis points. However, the RBNZ Governor has recently indicated that the central bank will raise interest rates more slowly than it reduced. Thus, the Governor’s statement has poured cold water on the likelihood of large 50 basis point hikes.

The central bank believes a measured policy approach is appropriate in terms of uncertainty when risks are evenly balanced. The RBNZ emphasised that when there is a material threat of the central bank not achieving its employment and inflation targets, the path of least regret is to move rapidly. Instead, the central bank intends to take small, considered steps while assessing the environment around the country.

The publication of the RBNZ’s Governor latest speech has prompted financial markets to lower their anticipations of a large hike on October 6. Speculations are now rife that the central bank may do 25 basis points rate hikes in October & November.

In a nutshell, the chances of an October rate hike primarily depend on how far the economy has reached from its set inflation and employment targets. Meanwhile, the state of the lockdowns imposed to curb the virus spread and the pace of vaccinations are also expected to play a crucial role in driving interest rate decisions.

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