Ms Zollner said the risks for short-end interest rates in New Zealand were biased to the downside, “in particular, the COVID outbreak seems likely to get worse before it gets better”.
RBNZ’s caution reflects the country’s pandemic situation. Auckland has been in lockdown since mid-August due to an outbreak of the delta variant.
“The economy is expected to have contracted sharply as a result of the recent COVID-related restrictions, although by less than the first national lockdown in the second quarter of 2020,” RBNZ said.
“The current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment.”
The bank previously flagged it would take a “sustained” large fall in business sentiment to derail its rate rise plans, which has not eventuated.
Parallels to Australia
Prime Minister Jacinda Ardern this week became the latest leader to abandon a virus elimination strategy when she outlined a three-stage plan to ease restrictions and begin living with the virus.
Similar to the Australian experience, Auckland businesses affected by stay-at-home orders have hoarded staff ready for reopening amid a tight labour market caused by the country’s closed international border.
Unlike Australia, RBNZ has a specific mandate to assess the impact of monetary policy against the government’s objective to support more sustainable house prices.
The Ardern government introduced the requirement earlier this year under intense political pressure to cool the country’s overheated housing market, fuelled by the country’s record low interest rates.
House prices lifted, on average, 26 per cent over the year to August.
On Wednesday, RBNZ’s Monetary Policy Committee acknowledged the bank’s view that house prices remain unsustainable, but that recent macro-prudential measures would constrain growth in the medium term.
Earlier this year, New Zealand also lowered the tax incentives for new investors by limiting how much of their mortgage interest on properties could be deducted from income.
In Australia, the focus of the government and regulators has been on macro-prudential interventions to ensure the booming local market does not create financial stability risks.
Reserve Bank of Australia governor Philip Lowe has made clear he believes it is not the role of the RBA or interest rates to cool the hot housing market.
More broadly, RBNZ noted rising demand alongside capacity constraints is contributing to higher inflation, with the bank forecasting CPI to rise above 4 per cent in the near term before falling over the medium term.
“Cost pressure in New Zealand has been accentuated in the near term by higher oil prices, supply shortfalls and rising transport costs,” the bank said.
However, in contrast to Australia, which also experienced a COVID-19-related spike in headline inflation in the June quarter, core inflation in New Zealand is near the mid-point of RBNZ’s 1 per cent to 3 per cent target band.
ANZ notes that while both countries have seen remarkable labour market recoveries over the past year, only New Zealand has seen wage growth pick up significantly, alongside rising core inflation.
But the bank also notes that New Zealand’s wage growth of 2.1 per cent year-on-year would still be too low to support a rate increase in Australia, where the RBA believes wages growth sustainably above 3 per cent will be needed to drive inflation within its target band.
Domestically, trimmed mean inflation, which strips out outlier price changes and is the RBA’s preferred measure of inflation, was just 1.6 per cent in the three months to June 30. The RBA’s target band is 2 per cent to 3 per cent, though some economists have called for that to be lowered.
Writing in The Australian Financial Review this week, Westpac chief economist Bill Evans suggested a lower inflation target would give the RBA more flexibility to lift rates earlier and stem growing house prices.