The Covid lockdown has temporarily at least derailed the Government’s hopes that the Reserve Bank might tame the runaway housing market.

And what must worry Finance Minister Grant Robertson will be if the lockdown extends into weeks and the Reserve Bank’s “temporarily” becomes semi-permanent.

At a press conference late yesterday, Robertson was putting a brave face on it and maintaining that any discussion about an extended lockdown was hypothetical.


However, the facts are simple.

The Bank yesterday had been expected to raise the Official Cash Rate to drive interest rates up in a bid to restrain housing demand and rising inflation.

It has already begun winding back its monetary stimulus of the economy through its Large Scale Asset Purchase programme, where it essentially “prints” money to purchase Government bonds.

The programme had a cap of $100 million, but the Bank ceased purchases on July 23.

As an indication of its scale, the Government’s interim financial statements for the 11 months ended May 30 show a deficit of $3.6 billion and net core Crown debt of $101.5 billion.

The Bank’s statement  (obviously prepared before the Covid outbreak) emergency levels of monetary stimulus were no longer warranted given the strength in employment and rising inflationary pressures.


But that judgement may now be up in the air with the return of the Covid lockdown and the list of cases growing all the time. (The Prime Minister’s Office confirmed last night there were three additional cases to the seven new cases announced at 1.00 p.m.)

Regardless, the case for the Bank to leave the official Cash Rate where it is now stronger. The consequence of that will be not only to provide stimulus to the overall economy as it gets battered by the lockdown but also to continue the pressure on the housing market.

The only alternative is that Robertson could provide more fiscal stimulus to the economy, which by its nature (wage subsidy) might be less likely to flow into mortgages.

Last year’s lockdowns saw the Government spend $16.6 billion on the wage subsidy to support 1.6 million jobs.

No one knows how long the current lockdown might last or how many jobs might need support.

Robertson, however, is not phased by the prospect of having to find possibly billions more to finance the subsidy and in other assistance to businesses during the current lockdown if it lasts for any length of time.

“Where we are right now today, the early stages of this, we have the fiscal space to deal with what we need to deal with,” he said.

“Clearly, if we were in a situation as we were last year, we had a very extended lockdown, then the Reserve Bank would look at what its role was. “And that would inevitably be more stimulus for the housing market.

“But I’m very confident that the measures that we are taking with the wage subsidy scheme and residual support payment and the other related economic support we’ve got are sufficient for the situation we find ourselves in,” he said.

 Robertson said we would not even need to take on extra borrowing “at this time” to finance the wage subsidy scheme.

“We have the resources that we need to make the supports that we have announced,” he said.

But he then added: “We’ve always said we’ll do what it takes to make sure we support New Zealanders through Covid-19.”

Bank economists stressed the uncertainty surrounding the current economic situation.

The ANZ questioned how relevant, therefore, the Reserve Bank’s interest rate projections might be.

“The Official Cash Rate outlook in the Monetary Policy Statement is strictly speaking only relevant in the instance that this outbreak is dealt with successfully and promptly,” said ANZ economists Sharon Zollner and David Croy.

“That is far from a given, unfortunately, but it is our base case and that of the RBNZ.

“All going well, the RBNZ expects to raise the OCR steadily, to 2.14% by the end of the forecast period, September 2024.

‘This is a much more aggressive track than in the May MPS, where the OCR hit 1.78% by mid-2024 ‘

The Kiwibank economics team said the current delta cluster would “hopefully” prove a short-lived disruption.

“We think what’s more important to the direction of monetary policy over the next year is the current underlying picture for the economy.

“As we have seen in the past, once NZ gets through a covid outbreak, the release of pent up demand is astonishing.

“And at present, we have an economy that has the wind at its back. “

Therefore, they argued beyond the current cluster, the emergency monetary policy settings no longer seem warranted.

ASB Chief Economist Nick Tuffley said what happened to the economy would depend on the length of the outbreak.

“A short-lived lockdown is likely to have only modest lasting impacts once catch-up activity happens,” he said.

“ In that case, the broader economic outlook wouldn’t shift too much, and the RBNZ will embark on its signalled tightening cycle.

“But a more drawn-out period of tight restrictions would increasingly chip away at that outlook.”

Westpac acting Chief Economist, Michael Gordon, said Robertson was doing the right thing by stoking the economy while the Bank stood back.

“Easier monetary policy is not the right response to lockdown conditions,” he said.

“Instead, fiscal policy is the best way to provide support – and this is, in fact, happening, as the Government has reintroduced the measures that it used in previous lockdowns, such as the wage subsidy scheme.”

What the economists all agreed was the fundamental economic problem; the overheated economy and an overheated housing market were still lurking in the background.

Robertson would obviously prefer the Reserve Bank to be raising its Official Cash Rate to reduce demand for mortgages rather than reviving its Large Scale Asset  Purchase programme with the pressure that would place on the housing market.

That is why there is such a premium on this being a short lockdown.