Delta not clipping the wings of RBNZ hawks yet

New Zealand has entered a draconian lockdown and new infections continue to rise. The lockdown prompted the RBNZ to refrain from hiking interest rates at its August meeting and financial markets were only pricing in a 50% chance of a rate hike in October at the start of this week. However, that probability jumped to 80% following hawkish comments by Deputy Governor Hawkesby on Tuesday.  He noted that the Bank had considered the case for a 50bp hike at its August meeting and that the outlook for monetary policy wasn’t closely linked to lockdowns. Indeed, the Bank’s August Statement acknowledged that while a renewed virus outbreak would pose the biggest downside risk to economic activity, the “economy is resilient to periods at higher alert levels if there is significant government support provided”. We still assume that the more contagious Delta variant will prove too difficult to control to allow a marked easing of restrictions over the coming weeks and expect the Bank to delay the first rate hike until next year. But if the measures succeed in reining in the outbreak before long, the RBNZ may still hike in October.