By Praveen Menon

WELLINGTON (Reuters) -New Zealand’s central bank delayed raising rates on Wednesday as policymakers quickly shifted gears after the country was put into a snap COVID-19 lockdown over a handful of new cases, but the bank still expects a hike before year-end.

The Reserve Bank of New Zealand (RBNZ) held the official cash rate at a record low of 0.25% despite the economy running red-hot and a majority of analysts polled by Reuters last week expecting a hike.

Some had said Governor Adrian Orr may even deliver a 50 basis point rate hike https://www.reuters.com/article/newzealand-economy-rates/new-zealands-snap-covid-lockdown-casts-doubt-over-expected-rate-hike-idUSL4N2PO0KO.

However, New Zealand’s first local COVID-19 infection in six months, and a snap lockdown ordered for the entire nation on Tuesday hosed down those expectations and forced policymakers to confront the risk of a potentially premature move now.

“Today’s decision was made in the context of the government’s imposition of Level 4 COVID restrictions on activity across New Zealand,” RBNZ’s monetary policy committee said in a statement.

A hike would have made New Zealand the first both in the Asia-Pacific and the G10 currency block to raise rates in the pandemic era.

The Pacific island’s decision to delay policy tightening underscored growing global concerns over the spread of the Delta variant in several countries, sapping confidence in financial markets which had only recently bet on a strong revival in world growth. [MKTS/GLOB]

The New Zealand dollar briefly dropped 0.7% to a nine-month low of $0.6862 following the announcement, before steadying to trade around $0.6930 because the RBNZ’s forecast still shows a hike is on the horizon.

“The Reserve Bank was ready to pull the trigger, COVID comes along 24 hours earlier and so they’ve just pulled back on that,” said Jason Wong, senior market strategist at BNZ in Wellington.

“All the projections and signs on inflation and employment meet (conditions) to raise interest rates, it’s just that this uncertainty has come out of left field and delayed it.”

“ROLLING DISRUPTIONS”

RBNZ projections showed policymakers still expect to raise rates over coming months, with the cash rate seen at 0.50% by the end of the year, 1.5% by mid next year and over 2% by end of 2023.

Markets are now pricing a 60% chance of a hike in October

Governor Orr told reporters at a press conference that the bank’s clear direction is to be reducing monetary stimulus and lifting the cash rate.

“This in a sense has not shifted us at all from that broad path, but it has given us time for pause while we observe the outcomes of the next few days and weeks,” Orr said.

“We are comfortable on demand side but our concern is around supply capacity at the moment. So for our medium term we remain on course to be managing that tightening in monetary conditions,” he added.

While most developed economies are still holding off hiking, New Zealand’s successful COVID-19 elimination strategy has fired a hot economic recovery and stoked inflation.

However, New Zealand’s vaccination rate is low, leaving the nation of 5 million vulnerable – a fact underscored by the latest detection of the highly infectious Delta variant https://www.reuters.com/world/asia-pacific/new-zealand-reports-4-more-covid-19-cases-delta-variant-spreads-2021-08-17which has hobbled neighbouring Australia.

Orr said they have now built in permanent flexibility and are less concerned about the impact of a COVID outbreak on the economy than before.

“We are going to have rolling periods of disruptions as we see around the world and we have to be able to manage those periods of disruptions,” Orr said.

“That was written about in the document…no one expected it to be a live example on the day of this announcement.”

(Reporting by Praveen Menon; Editing by Shri Navaratnam)

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