Economic Weekly: Nail-biting decision week

This is going to be a pretty momentous week for decisions by the powers that be.  Monday 4pm brings the next decision on Alert Levels and a ‘roadmap’ out of lockdown.  Wednesday 2pm is the moment we see whether the RBNZ delivers its first OCR increase in seven years, notwithstanding the current Delta outbreak won’t be stamped out at that point even if the Alert Level decision and the ‘roadmap’ will at least be known.

This afternoon’s Cabinet decision on Alert Levels has to be one of the toughest to make yet.  New cases are if anything picking up in pace along with rising ‘unexplained’ cases.  The virus has clearly leaked out of Auckland, with parts of Waikato now at Level 3.  It appears increasingly risky to ease Auckland’s Alert Level 3, as doing so right now strongly suggests COVID would get even more entrenched in the community.  But seven weeks of restrictions are taking their toll on people and businesses alike.  Fatigue, rule-breaking and financial pressures are rising. 

The Government will today lay out its ‘roadmap’ out of lockdowns, which sounds like it will involve vaccination targets for the easing of restrictions (particularly those that pop household bubbles).  Should the plan for Auckland require ongoing Level 3 style restrictions be extended for potentially weeks, then providing added financial support for businesses would be prudent to give businesses some further means to survive until they are able to trade with more freedom.  NZ is poised on the knife-edge of heading down Australia’s patch, where elimination is over for key states and restrictions are retained to buy time for vaccinations to hit high population thresholds by slowing COVID’s spread.  If NZ heads that way, then restrictions risk being in place for longer to take pressure off the health system.  But other pressures will build.

The RBNZ’s Wednesday decision looks more straightforward, though not without its own risks of hindsight being a cruel judge.  We still expect the RBNZ to lift the OCR this week, as noted in more detail in our preview.  There’s no doubt the lengthy shift up Alert Levels has added a lot of new uncertainty into the mix.  But, given the medium-term outlooks for inflation pressures and labour market tightness, cautiously tightening monetary policy is still the ‘least regret’s approach – at least for now.