OPINION:
The message from Reserve Bank yesterday was clear.
Rates are still likely to rise, not withstanding a giant virus-shaped caveat hanging over everything.
Despite leaving the official cash on hold at 0.25 per cent, the RBNZ's long-term focus remains keenly fixed on inflation and an economy running at full stretch.
Actually, make that the medium-term focus.
The message was so firm that markets have retained short odds on rates hikes in October, November and February.
The trend remains "less need for the existing level of monetary stimulus", to use the Reserve Bank's words.
It was a "hawkish hold", said ANZ chief economist Sharon Zollner.
"There was no doubt the RBNZ would have delivered a 25bp rate hike, had the country not gone into a swift lockdown," said KiwiBank chief economist Jarrod Kerr.
Kerr noted Reserve Bank Governor Adrian Orr's comment that there was "time for pause while we observe".
Orr said in he felt better, in relative terms, with the situation New Zealand faces today than he did early last year when the impacts of a pandemic were largely unknown.
He stressed the bank's focus on adapting to uncertainty.
"We have built in permanent flexibility," he said.
"It's not a case of having the [Covid] issue or not having the issue. We're going to be dealing with rolling periods of disruption."
The official statement leaned heavily to acknowledging the inflationary problems dogging the economy this year: tight labour market conditions, one-off price rises such as higher oil prices, and temporary factors such as supply shortfalls and higher transport costs.
It also noted that house prices are above their sustainable level, heightening the risk of a price correction as supply increases.
But everything came with a caveat about the lack of certainty in the time of Covid.
Markets reacted swiftly to the news but traders were far from shocked.
The New Zealand dollar initially dropped about 0.7c to a low of US68.70c before making up most of its losses.
By 3pm the currency was back up at US69.20c. It was trading at US70.18 before news of the Covid outbreak yesterday.
"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.
Financial markets would be very sensitive to the run of Covid headlines, so we should brace for a period of volatility, said ASB's 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.
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"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".
Forecasting in the Covid era was clearly "a mug's game" and the outlook was now much more uncertain than it already was, said ANZ's Zollner.
"The RBNZ's forecasts, like ours, may or may not be worth the paper they're written on," she said.
"We'll know a lot more in a week. But optimistically assuming that we've got this, we are assuming that this is a temporary detente, and have merely pushed the timing of our OCR forecast out to reflect the later start.
"We are now forecasting that the RBNZ will raise the OCR in 25bp increments in October, November, February, May and August next year, to a peak of 1.5 per cent as before".
But if New Zealand headed into a prolonged lockdown then a hike in October was much less likely.
"And if, even worse, the lockdowns don't appear to be on track to eliminate Covid-19 at all, then OCR hikes could be off the table for a considerable period, as the RBNZ focuses on shoring up confidence."
