Economic Weekly: Travel bubble boost and RBNZ interest rate angst

The Reserve Bank of New Zealand’s (RBNZ) April Official Cash Rate (OCR) review on Wednesday is likely to be the key focus of domestic markets this week.  The April OCR review is typically a one-page statement plus a summary of the Monetary Policy Committee’s meeting, and does not publish updated forecasts.  The key focus of the RBNZ communication will keeping a lid on longer-term interest rate expectations - 10-year interest rates have jumped sharply in NZ and abroad over 2021.  This lift has been supported by improved global financial market sentiment as the end of the COVID-19 pandemic seems in sight.  And while that may be the case for the US, which could reach herd immunity within the next three months, there is still a long way to go in NZ before we can open the borders and return to normal.  The RBNZ will be wanting to avoid a premature tightening in monetary conditions in NZ.   The unexpected fall in December quarter GDP highlights the fragility of the NZ economic recovery over the year ahead.   Read our full RBNZ preview here.

Last week, NZ has finally confirmed a reciprocal travel bubble with Australia.  The announcement is likely to be some relief to those with friends and family across the ditch. It also opens the possibility for more New Zealanders to relocate back home from Australia.  However, the hopes that it would also boost the numbers relocating from further abroad were dashed somewhat, as it was revealed that some of the MIQ facilities that have been used for ‘low-risk’ Australian arrivals are not appropriate to safely manage arrivals from higher-risk countries.

For the economy, our view is that the Trans-Tasman travel bubble will have limited net impact on the economy, with the possibility of a small positive.   However, the bubble may only have limited benefits to the tourism industry. The bubble is more appropriate for those visiting friends and family, rather than holiday makers given there is the ongoing possibility of being stranded if there was a community outbreak.  Given the relative frequency of outbreaks due to MIQ breaches in both in NZ and Australia over recent months, a short-term pause or suspension of quarantine-exempt flights is likely at some point.  The Prime Minister has made it very clear that travellers need to be prepared for such a scenario.   Nonetheless, to the extent that Australian visitors here to see family may also take the opportunity to visit some of NZ’s tourism highlights, the travel bubble may help shift some of the spending towards some of the regions which have been struggling due to closed borders.  Over summer anecdotes suggest NZers preferred to holiday at the beach rather than Queenstown and the southern regions have been struggling.   However, with winter approaching, Queenstown could be set for a solid ski season with the possibility of both NZers and Australians keen to hit the slopes given the lack of other winter holiday alternatives.