As we previewed yesterday when we reported the surprise decision by New Zealand to impose a new draconian nationwide lockdown following the emergence of one new covid case, the kiwi tumbled as expectations of an imminent rate hike by the RBNZ - which would make it the first G10 nation tightening monetary policy - quickly crumbled.
And sure enough, after previously creating a market expectation that it would implement its first rate hike, overnight the Reserve Bank of New Zealand - which as a reminder is now tasked with also containing the country's massive housing bubble it helped create - opted for a (hawkish) hold vs dwindling expectations for a 25bps hike as RBNZ policymakers quickly shifted gears after the country was put into a snap COVID-19 lockdown over a handful of new cases.
The RBNZ's Statement laid out a very clear tightening bias, but it explained that the Bank chose not to tighten due to the recently imposed lockdown. The RBNZ concluded with the following: "The Committee agreed that their least regrets policy stance is to further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment. They agreed, however, to keep the OCR unchanged at this meeting given the heightened uncertainty with the country in a lockdown."
While the RBNZ just missed its chance to be the first in G-10 for a rate hike (Norway now on track, see below), the central bank’s rate projections suggest this is a "hawkish hold", and may not be bullish for rates in the medium term. The central bank's stance was framed as hawkish as it remains on a course towards removing monetary stimulus given the backdrop of strong economic data, with this decision merely a "pause" in the face of a COVID threat, whilst banks suggest that lockdown downfalls can be addressed by fiscal policy.
The NZD saw a knee-jerk lower to a new YTD low (0.6868) upon the surprise hold but quickly retraced it and reclaimed a 0.6900 handle as the rate path saw sizeable upgrades across the board. The kiwi however encounters some mild pressure as US players enter the fray and react to the RBNZ.
The adverse development our of New Zealand has implications far beyond just local markets. Akira Takei at Asset Management One in Tokyo said that the RBNZ's decision to keep its policy on hold “poured cold water” on the outlook for rate hikes and asset-purchase tapering globally. According to the strategist, RBNZ’s decision signifies the risk of virus infections that other central banks can’t ignore. At the same time, its projection for higher policy rates is unlikely to materialize
“It’s rare that central banks’ forecasts have proved correct.” That’s because “they reflect policy makers’ hopes” that economies will fare well. This especially relevant in the context of the Fed which also appears overly confident in the economic outlook, and the emerging risk is that unreasonable tapering could risk causing the economy to slow and shift inflation expectations downward, Takei added.
Echoing this sentiment, Reuters this morning notes that New Zealand’s decision on Wednesday to hold fire on a highly-anticipated rate hike "is a reminder of the challenges major central banks face in their bid to step away from emergency stimulus while the coronavirus remains a threat to growth." That said, a hike is still expected before the year-end, lending some support to a kiwi dollar that has taken a beating over the last two sessions.
So with the Delta variant delaying an expected rate hike in New Zealand, Norway will likely be the first G10 economy to begin the journey out of an era of emergency-level interest rate lows. Here's a look at where major central banks stand on the path out of pandemic-era money printing, via Reuters.
- Norges Bank now looks set to lead, with a hike from Norway's record low 0% interest rate flagged for September. In fact, the central bank plans to raise rates four times by mid-2022 as the economy recovers. It doesn't intervene in bond markets, so the taper debate is not applicable.
- The Reserve Bank of New Zealand kept its benchmark cash rate at a record-low 0.25% on Wednesday while it waits to see where a nascent COVID-19 outbreak will lead for the economy. It still thinks rates are rising soon, though, and published an aggressive outlook forecasting the cash rate above 0.5% by the end of this year over 2% in 2024.
- The Bank of Canada announced tapering in April and in July cut its weekly net purchases of government bonds to a target of C$2 billion ($1.6 billion) from C$3 billion. It is expected to further trim its bond-buying programme this year, setting the stage for a rate hike in late 2022. Canada's key rate is at a record low of 0.25%.
- The Federal Reserve has moved its first projected rate increases to 2023 from 2024. With the economy growing robustly and the jobs market rebounding, several officials have signalled it is nearly time to start withdrawing support. Most economists in a recent Reuters poll expected the Fed to announce a plan to taper its $120 billion monthly asset purchase scheme in September. A resurgent Delta variant of COVID-19 remains a headwind and any signs that the recovery is at risk could prompt a re-think of the taper timeline.
- The Reserve Bank of Australia surprised markets this month by sticking with a decision to start tapering bond buys in September to A$4 billion ($2.9 bln) per week from A$5 billion. The RBA considered the case for a delay but decided fiscal stimulus was "more appropriate" to deal with virus lockdowns. But a rate rise seems a long way off. The central bank has stressed that its 0.1% cash rate will not be raised until inflation is sustainably within its 2-3% target band, a goal unlikely to be met before 2024.
- The Bank of England this month laid out plans to wean the economy off pandemic-era stimulus, although for now it has kept its bond-buying at full speed and said an eventual reduction in support would be "modest". Policymakers expect inflation to hit 4% by year-end -- double the BoE's target -- but they are confident the rise will be temporary. So the BoE's bond-buying programme remains unchanged at 895 billion pounds ($1.24 trillion) for now, with rates at just 0.1%. Economists polled by Reuters do not expect a rate rise until 2023. Markets are pricing one for the second half of 2022.
- Swedish inflation is rising and just below the Riksbank's 2% headline target but policymakers reckon the rise is temporary and warn against withdrawing support too quickly. Rates will stay at 0% for years, they believe. However, with Sweden's economy already back to pre-pandemic levels, the Riksbank has called time on bond purchases -- a 700 billion crowns ($80.92 billion) asset purchase programme is scheduled to expire at end-2021.
- Economists expect discussions about rolling back the European Central Bank's 1.85 trillion euro ($2.21 trillion) Pandemic Emergency Purchase Programme (PEPP), scheduled to run until at least end-March, to begin in the next quarter. Even then, the ECB is expected to maintain hefty support via existing asset purchases -- a view cemented by a recent decision to change its inflation target to 2%. It looks likely to be one of the last major central banks to hike rates, which were last lifted in 2011.
- Japan will remain a noticeable laggard at withdrawing pandemic-era stimulus. The $4.4 trillion economy will grow at a much slower pace than expected given a resurgent COVID-19. Economists expect the Bank of Japan to hold its short-term interest rate target at -0.1% and the 10-year bond yield target around 0% when it meets in September. And elusive inflation means rates will remain low for some time.
- The Swiss National Bank also looks set to keep monetary policy ultra-loose for the foreseeable future and believes projected higher inflation is no reason to change course. The SNB has the world's lowest interest rate at -0.75% and it uses foreign exchange purchases as a key monetary policy tool. One spot of bother is a resurgent franc, which has gained nearly 2.5% versus the euro since late June. Intervention to counter a strong currency would bloat an already vast SNB balance sheet, but not intervening means the export-led rebound takes a hit
Investors will also be hoping to get the latest clues on the timing and pace of the U.S. Federal Reserve’s asset purchase tapering meanwhile. They’ll be poring over the minutes due later on Wednesday of the July 27-28 meeting, when officials declared the recovery on course despite the rise of the Delta variant of the coronavirus.
The readout will be key to the short-term outlook for the greenback and Treasury yields, especially if it confirms more policymakers are leaning towards tapering bond purchase plans by the end of the year. Of course, economic data since then has muddied the waters: strong labor market numbers have spurred a number of policymakers to ramp up talk of an earlier-than-expected start to tapering. On the other side, an unexpectedly large miss in retail sales coupled with a plunge in consumer sentiment suggests a sharp slowdown in economic growth early in the third quarter.
Fed Chair Jerome Powell said on Tuesday it remained unclear whether the heightened outbreak of the coronavirus Delta variant will have a noticeable impact on the economy.