Covid 19 coronavirus: Reserve Bank leaves Official Cash Rate on hold

Reserve Bank Governor Adrian Orr at an earlier Monetary Policy announcement. Photo / Mark Mitchell

The Reserve Bank Monetary Policy Committee has agreed to keep the Official Cash Rate (OCR) on hold at 0.25 per cent for now.

Today's decision was made in the context of the Government's imposition of alert level 4 Covid restrictions on activity across New Zealand, Reserve Bank governor Adrian Orr said.

The committee said their "least regrets policy stance" was still to further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment.

But they agreed, however, to keep the OCR unchanged at this meeting given the heightened uncertainty with the country in a lockdown.

The New Zealand dollar dropped another half a US cent to US68.73c from US69.36c just before the release.

However, by 3pm the currency had made up most of is losses, reaching US69.20c.

"The Kiwi rebounded once the market realised that the tightening is still happening but that it has just been pushed out by one meeting," Westpac senior markets strategist Imre Speizer said.

"They (the Reserve Bank) are still of a hawkish mindset. They just see the near term uncertainty, which they see as worth waiting for to see how it pans out," he said.

The dollar has fallen from US70.18c yesterday just before the announcement the Delta variant had arrived in NZ.

"The first shock to the market was the 'no hike' but on closer inspection, the track seems to be consistent with hikes in October, November and February and then again in May next year.

The overall message to the market here is one of postponement rather than an abandonment of the desire to lift interest rates." David Croy, senior markets strategist at ANZ, said.

"Capacity pressures are now evident in the economy, particularly in the labour market where job vacancies remain high despite the recent decline in unemployment and underemployment," the Reserve Bank said.

Wages were rising consistent with the tight labour market conditions.

Broader inflation pressures were being accentuated in the near-term by one-off price rises such as higher oil prices, and temporary factors such as supply shortfalls and higher transport costs.

"Near-term consumer price inflation is expected to rise above the Committee's target range before returning towards the 2 per cent midpoint around mid-2022".

The committee was confident of meeting inflation and employment targets with less need for the existing level of monetary stimulus.

It also noted that house prices are above their sustainable level, heightening the risk of a price correction as supply increases.

It was clear the RBNZ intended to lift the OCR at an orderly pace starting from today, if the Covid outbreak hadn't occurred, ASB chief economist Nick Tuffley.

"Our outlook for the OCR – based heavily on the lockdown being short enough to cause little long-term damage – is that the RBNZ will lift the OCR 25bp in October, November and February to 1 per cent, before gradually nudging up to 1.5 per cent by the end of 2022," he said.

"This is very much a light pencilling in of an outlook and should be taken as a rough guide that can change quickly as the situation unfolds".

- Additional reporting Jamie Gray