WELLINGTON - A snap lockdown in New Zealand following new COVID 19 cases could see the central bank back off from a widely forecast interest rate hike on Wednesday, which would have made it the first Asia-Pacific economy to tighten monetary policy in the pandemic period.
The economy is running red-hot and a majority of economists polled by Reuters last week expected the Reserve Bank of New ZealandBank of New Zealand to raise the official cash rate from a record low to 0.50%.
Some may say Governor Adrian Orr might even deliver a 50 basis point rate hike.
Nonetheless, by the first snap infection of COVID - 19 in six months, was ordered on Tuesday and a local lock down declared for the whole nation has hosed down those expectations with some economists expecting no change.
There is nothing to be gained from pushing the OCR higher now, rather than waiting for clarity on the Covid situation, said Westpac New Zealand Acting Chief Economist Michael Gordon, who no longer expects a rate hike.
Others said it would still increase rates, but expectations of a bolder move have tempered.
The unexpected lockdown in response to a fresh case of COVID 19 in the community will probably be enough to see the RBNZ back off the 50 basis points hike we had expected, said Ben Udy of Capital Economics.
But the case for tightening remains strong so we think the Bank will hike rates by 25 basis point and replace rates with 0.00% by the end of this year, he added.
A hike on Wednesday would make New Zealand the first in the Asia-Pacific and the first of the G 10 currency nations to raise rates in the pandemic.
Market expectations for a 25 basis point rate hike on Wednesday fell from 100% probability to under 80% probability when the news of the lockdown came out, while those for leaving rates unchanged gradually increased.
While most developed economies are still holding off hiking, New Zealand's Successful COVID - 19 elimination strategy has continued to build a hot economic recovery and stoked inflation.
A rate hike is, however, not without risks.
New Zealand's vaccination rate is low, leaving a nation of 5 million vulnerable if the highly infectious Delta variant spreads in the community as it has had in parts of neighbouring Australia.