New Zealand holds rates at record low as fresh Covid-19 outbreak stokes uncertainty

[WELLINGTON] New Zealand's central bank on Wednesday left interest rates unchanged at a record low of 0.25 per cent, as policymakers quickly shifted gears after the country was put into a snap lockdown following the detection of new coronavirus cases.

The economy is running red-hot and a majority of economists polled by Reuters last week had expected the Reserve Bank of New Zealand (RBNZ) to raise the official cash rate (OCR) by 25 basis points from a record low to 0.50 per cent.

Some said Governor Adrian Orr may even deliver a 50 basis point rate hike.

However, New Zealand's first local Covid-19 infection in six months, reported on Tuesday, and a snap lockdown ordered for the entire nation hosed down those expectations and forced policymakers to confront the potential risks of moving now.

"Today's decision was made in the context of the government's imposition of Level 4 Covid restrictions on activity across New Zealand," RBNZ's monetary policy committee said in a statement.

The New Zealand dollar dropped 0.3 per cent to US$0.6917 after the announcement.

RBNZ projections showed the cash rate would reach 0.50 per cent by the end of the year, 1.5 per cent by mid next year and over 2 per cent by end of 2023.

A hike on Wednesday would have made New Zealand the first both in the Asia-Pacific and the G-10 currency block to raise rates in the pandemic era.

While most developed economies are still holding off hiking, New Zealand's successful Covid-19 elimination strategy has fired a hot economic recovery and stoked inflation.

However, New Zealand's vaccination rate is low, leaving the nation of 5 million vulnerable - a fact underscored by the latest detection of the highly infectious Delta variant which has hobbled neighbouring Australia.

REUTERS