Delta hinders plans for RBA to taper and highlights fragility of RBNZ tightening cycle

"The Board would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery."

Lockdowns in NSW are expected to extend until the end of October when an 80% vaccination rate is reached. In response, Westpac's Chief Economist Bill Evans has cut his national GDP forecast in the September quarter from -2.2% to -2.6%; and lowered the forecast 2021 growth rate to 2.4% from 3.2%.

Presuming Westpac's forecast is accurate, this would seem to satisfy the criteria of a "significant setback" and cause the RBA to announce a delay to its taper plan at its September meeting in three weeks, for at least three months.

This brings us to the next big economic event, the highly anticipated RBNZ interest meeting tomorrow at midday. The RBNZ is expected to become the first major central banks to raise interest rates since the COVID-19 pandemic commenced.

After a run of hot data noted in an article last week here, the NZ interest rate market last week was fully priced for a 25 bp hike, with a 30% chance of a 50 bp hike. However, this afternoon, a dramatic repricing has occurred following news of a New Community case of Covid in Auckland.

A slow vaccination roll-out has left New Zealand extremely vulnerable should Covid breach its defenses. In recognition of this, the interest rate market has eased back to an 80% chance of a 25bp hike at tomorrow's meeting.

After testing the December 1st 1.0418 low earlier this morning, the AUDNZD cross rate has spring boarded higher this afternoon above 1.0500, driven by the apparent fragility of commencing an interest rate tightening cycle in the current climate.

While the origins of the mystery case and any spread are investigated, further gains towards 1.0600 appear likely in the short term.

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