Reserve Bank plays it safe with outbreak
This week was supposed to be all about the Reserve Bank. For all money, our central bank was set to increase the Official Cash Rate (OCR) for the first time since 2014.
However, the emergence of the Delta variant of Covid-19 the day before saw the Reserve Bank change tack, play it safe and leave interest rate settings unchanged. That was absolutely the right move, at least until we get our heads around the extent of this latest outbreak.
It should be noted that interest rate hikes have merely been delayed, and we are still likely to see them rise gradually from here. Reserve Bank projections still point to at least one increase before the end of this year, and for the OCR to reach 2 per cent two years later.
That’s still low by historic standards, but it would be much higher than the current 0.25 per cent and mortgage rates have already started moving in anticipation.
I refixed a mortgage six weeks ago at 2.19 per cent for 12 months, and today the equivalent rate at my bank is 2.69 per cent. That would be a $40 weekly increase on a $700,000 home loan, and there’ll be more to come as the banks follow the OCR up.
Interest rate rises will certainly hit us in the pocket over the coming year, which might become a headwind for house prices.
All of this could change depending
on how the current situation unfolds, and it certainly feels as if it’s likely to get worse before it gets better.
Then again, New Zealand’s hardand-fast approach should lead to better outcomes than we’ve seen across the Tasman, and as we’re heading into summer we should be back on track.
Businesses should cope much better this time round. Many staff are already set up to work from home, so the transition should be much more seamless.
Wage subsidies and other fiscal support initiatives have swung back into action, and these will continue should the current situation drag on
for longer than expected. We underestimated the impact of these measures last year, but today we know they save jobs and assist businesses.
We also know that the economy bounces back very quickly when restrictions are lifted, with consumers emerging from lockdowns in a positive mindset and with pent-up demand to satisfy.
At the same time, many sectors will be disproportionately impacted. During the level 4
lockdown of 2020, accommodation, construction and retail suffered most, with these industries experiencing significant declines in output.
In contrast, those considered essential services held up best, as they were still able to operate. This included the primary
sector, which was a crucial part of New Zealand’s recovery as the tourism sector was impacted from border closures.
Should the restrictions we’re facing be extended, we would expect the winners and losers on our sharemarket to follow a similar path to what we saw last year.
However, listed companies are in good shape and balance sheets are resilient, which should mean they are in a strong position to weather the storm. The softer NZ dollar will also be providing support for exporters.
When this current situation inevitably passes, markets will refocus on the Reserve Bank’s job of tightening monetary policy.
For most of us, the prospect of higher interest rates isn’t all bad. It’s important to remember why we’re talking about a gradual return to more normal settings.
Economic growth has been buoyant, commodity prices are solid, the labour market is tight and confidence is high. That’s a very supportive environment for businesses.
There’s no need for investors to panic in the wake of what we’ve seen over the last few days. That course of action wouldn’t have helped in March 2020, and it won’t today either.
Uncertainty is the norm for financial markets, and while it can be unnerving at times, it also provides opportunities in the long game.
Mark Lister is Head of Private Wealth
Research at Craigs Investment Partners. The information in this article is provided for information
only, is intended to be general in nature, and does not take into account
your financial situation, objectives, goals, or risk tolerance. Before making
any investment decision Craigs Investment Partners recommends you contact an investment adviser.