Kiwi sinks as Covid case puts RBNZ rate hike in doubt

By Samuel Indyk

Investing.com – The New Zealand dollar tumbled on Tuesday after a case of COVID-19 was discover in Auckland, the first community case in New Zealand since February.

Lockdown

Prime Minister Jacinda Ardern announced that New Zealand was to enter a nationwide, 3-day, level 4 lockdown from Wednesday. Auckland - where the case was discovered - and the Coromandel Peninsula will enter a 7-day lockdown period.

Under the strictest level 4 lockdown rules only essential businesses will be operational, while all schools and offices will be closed.

New Zealand has also suspended vaccinations for 48 hours to ensure the safety of healthcare workers.

Ardern could not confirm whether the case was the more transmissible ‘Delta’ variant but warned that these measures are needed to try and contain the spread.

“While we know that Delta is a more dangerous enemy to combat, the same actions that overcome the virus last year can be applied to beat it again,” Ardern said.

Impact on RBNZ

The Reserve Bank of New Zealand meets tomorrow, and expectations were for the central bank to hike interest rates by 25 basis points to 0.50%.

However, the single case of coronavirus and subsequent nationwide lockdown has now prompted some banks and economists to change their forecasts.

Australian bank Westpac now expects the RBNZ to leave the OCR unchanged versus their previous forecast of a 25 basis point hike, saying there is nothing to be gained from pushing the OCR higher now.

ASB also expects the RBNZ to remain on hold tomorrow.

Capital Economics has also changed its call. Previously the consultancy expected the RBNZ to hike interest rates by 50 basis points to 0.75% but now expects a smaller 25 basis point hike.

“We had previously expected the RBNZ to hike rates by 50 basis points at its meeting tomorrow,” Capital Economics said in a note. “While we don’t yet know how long the lockdown will last, the uncertainty will probably be enough for the RBNZ to dial down its hike to just 25 basis points.”

NZD

NZD/USD sold off following the case and subsequent lockdown measures. The pair dropped to its lowest level since 28^th July as an interest rate hike on Wednesday becomes less of a formality. 

The RBNZ was widely expected to be the first major central bank to hike interest rates since the start of the pandemic but the timing of the new lockdown measures could end up forcing the RBNZ to wait before taking any action.