Covid 19 coronavirus: Economy Hub: Reserve Bank looking through lockdown

The latest Auckland lockdown shouldn’t require the Reserve Bank to revise its economic outlook as long as it is not prolonged, says the bank’s chief economist Yuong Ha.

Speaking on The Economy Hub video show, Ha said the current lockdown was within the range of scenarios that the Reserve Bank had modelled and while it was causing significant pain it wouldn’t shift its most recent forecasts.

“We do broad scenarios, so we have working assumptions to the different alert levels and what they might [mean] for spending and unemployment.

“So to give an example the current [situation] – Auckland in level 3 and the rest of the country at level 2 -might shave half a per cent off quarterly GDP if it was sustained.”

Those were still significant numbers and that’s part of the reason that the Reserve Bank is saying there is still a lot of uncertainty about the outlook, he said.

The Reserve Bank has been coming under pressure from some quarters – particularly those concerned about low interest rates driving up house prices – to pull back on stimulus.

“We need to have confidence that the recovery can be sustained and that inflation and employment are closer to our monetary policy remit before we can say we have done enough.”

The RBNZ still sees a period of “softness” for the economy through 2021 even if we come through this lockdown quickly, Ha said.

With borders closed Ha said the bank doesn’t expect growth to rebound or momentum to continue at the same pace as observed at the end of last year.

The RBNZ is forecasting annual GDP growth of just 0.6 per cent for 2021 after a dip in the first quarter.

It has unemployment lower than earlier forecasts but still rising slightly to 5.2 per cent by the end of the year.

“There is a lot of data we’re looking at,” Ha said.”We are still in this scenario world. There is no one key piece of data or one piece of information that will tell us convincingly where the economy is at.”

But hopefully when the borders open in 2022 that is when a sustained pick up in economic growth will be seen.

Central banks around the world have been at odds with market forces over the pace of the post-Covid recovery.

The yields on long-term bonds spiked last week as investors moved to get ahead of the curve on an expected return to more normal monetary policy conditions.

But central banks – including the RBNZ – have been firm in their messaging that low rates and stimulus will remain in place for some time yet.

The “yin and yang” of market forces and central banks was an interesting dilemma, Ha said.

“But it is one that central banks and policy makers have always had to deal with – markets running ahead of the economy.”

The rise of bond yields and the so called “reflation trade” was being driven off the back of good news about things like the effectiveness of vaccines, he said.

“But the lockdown this week was a clear and present example of what we’re still facing.

“The path of least regrets is to maintain the stimulus at current levels. It is not about declaring victory and talking about when you would start to remove monetary stimulus. It’s about staying the course.”


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