How a single Covid case derailed a central bank

New Zealand made the right call to shelve a widely anticipated interest-rate increase. The central bank should resist the temptation to merely delay by a month or two. The global recovery has probably peaked and the most consequential monetary authorities in the world are loath to contemplate tightening for at least a year. This isn’t the time for New Zealand to be ahead of the curve.
The Reserve Bank of New Zealand kept its benchmark rate at 0.25% Wednesday after a national lockdown — announced because
of a single case — injected last-minute drama into a decision many economists previously thought was a sure thing. While the country lived Covid-free for months, officials have confirmed seven infections the past two days. The shift was enough for the RBNZ to demur.
That Governor Adrian Orr still wants to hike is clear. The “least regrets” policy stance involves further reducing monetary stimulus to keep inflation in check and buttress employment, the bank said in a statement. Officials agreed, “however, to keep the [rate] unchanged at this meeting given the heightened uncertainty with the country in a lockdown.” Projections published by the RBNZ show the official rate climbing at least once later this year.
It takes a lot for a central bank to be blown off-course on a well-telegraphed change. While a few cases shouldn’t be enough to do so, they do point to the weakness in New Zealand’s otherwise promising economic scene. When you consider some of the basic metrics, withdrawal of accommodation is justified: Inflation pushed through the bank’s 1% to 3% target last quarter, a totemic issue for a country that inaugurated the practice of having a target three decades ago. The labor market appears robust; unemployment fell to 4% and wage growth is the highest in more than a decade. This trajectory is possible because New Zealand ran a controlled experiment within effectively closed borders. Such an approach can work for the short term. Whether it’s a sound basis for longer-term monetary planning is another question.
This rosy domestic picture was always vulnerable to the delta variant, which is taking a serious toll in important parts of Asia. After a rapid expansion at the start of the year, China’s rebound has become sluggish. In neighbouring Australia, gross domestic product is likely to contract this quarter.

—Bloomberg