The Reserve Bank has kept the Official Cash Rate at 1%, the level it's now been at since August 2019 and is indicating that it has now done with further rate cuts - unless the impacts of the coronavirus prove more long lasting than the RBNZ currently anticipates.
RBNZ Governor Adrian Orr (pictured) noted the emerging risk of the virus outbreak, but said the central bank was currently expecting the economic impact would be short term. However, it had time to adjust monetary policy if the impact proved to be "larger and more persistent" than currently thought.
A key change compared with the last OCR review in November is that the RBNZ has for now removed any suggestion of further potential cuts to OCR in future. As of now the RBNZ is picking an unchanged OCR right through to the March quarter next year and then the possibility of a rise in the June 2021 quarter.
In fact the RBNZ is now picking a full 25 basis points increase to the Official Cash Rate by the end of next year.
In an undoubted reaction to this shift in tone, the Kiwi dollar rose sharply, by about three-quarters of a cent to US64.75 cents. Wholesale interest rates rose sharply too with, for example, the two-year swap rate climbing 11 basis points to 1.19%.
The RBNZ finalised the projections contained in its new Monetary Policy Statement on February 5.
At this stage the RBNZ is projecting a 0.3 percentage point hit to New Zealand's March quarter GDP as a result of coronavirus. It is predicting 0.4% GDP growth for the quarter (so would have been 0.7% without the virus impact). This is actually a rather more benign projection of the impact than many of the country's economists have come up with.
BNZ head of research Stephen Toplis said taking everything into consideration, the BNZ economists see no reason to change their view that the OCR is on hold until the first quarter of 2022.
"Risks are two way. In the event the coronavirus gets really nasty, in a GDP growth sense, it is reasonable to assume the RBNZ would cut the cash rate in May or August. On the flip side, if the coronavirus’ impacts are short-lived and a fiscal easing is announced, at budget time [May 14}, then a rate increase in the first quarter of next year will look increasingly likely and might be accompanied by a more aggressive rate track thereafter than we have currently assumed.
"In terms of the next [RBNZ Monetary Policy Committee] meeting, 25 March, we think it unlikely that there will be sufficient new data, or clarity around the coronavirus, for the RBNZ to shift rates albeit that its views on risk may well shift slightly."
The RBNZ says its projections incorporate a coronavirus scenario where there is no substantial outbreak in New Zealand and the outbreak overseas is beginning to be contained by the end of February 2020.
The key assumptions underpinning the scenario are:
- GDP growth is 0.3 percentage points lower than otherwise in the March 2020 quarter. Lower export volumes are partly offset by a decline in import volumes and higher inventories.
- Service exports are 4% lower and goods exports are around 0.5% lower in the March 2020 quarter. Both gradually recover to their original levels by the December 2020 quarter. This is consistent with direct disruptions to travel lasting 6 weeks.
- Export prices are around 0.5% lower over the projection period, mainly reflecting the recent decline in whole milk powder prices.
- The New Zealand dollar Trade Weighted Index depreciated following the coronavirus outbreak. We assume it appreciates to 72 and remains around that level over the projection period. This is consistent with our assumption that the outbreak starts to be contained by the end of February.
- Oil prices are assumed to be around USD 60 per barrel over the projection.
This is the RBNZ's media statement:
The Monetary Policy Committee has decided to keep the Official Cash Rate (OCR) at 1.0 percent.
Employment is at or slightly above its maximum sustainable level while consumer price inflation is close to the 2 percent mid-point of our target range. Low interest rates remain necessary to keep employment and inflation around target.
Economic growth is expected to accelerate over the second half of 2020 driven by monetary and fiscal stimulus, and the high terms of trade. The outlook for government investment is stronger following the Government’s announcements in December. There are also indications household spending growth will increase.
However, soft momentum in economic growth has continued into early 2020. Slower global growth over 2019 acted as a headwind to domestic growth. In addition, competitive pressures and recent subdued business confidence have suppressed business investment.
The global economic environment has shown signs of stabilising and trade tensions have receded somewhat. However, the COVID-19 (coronavirus) outbreak is an emerging downside risk.
We assume the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration, with most of the impacts in the first half of 2020. Nevertheless, some sectors are being significantly affected. There is a risk that the impact will be larger and more persistent. Monetary policy has time to adjust if needed as more information becomes available.
Summary Record of Meeting - February 2020 Statement
The Monetary Policy Committee noted that employment was at or slightly above its maximum sustainable level while consumer price inflation was close to the 2 percent target mid-point. The Committee agreed that low interest rates had helped to get employment and inflation to around their target levels.
The Committee agreed that recent developments were consistent with continuing to meet their inflation and employment objectives, but the coronavirus situation was a complicating factor given how quickly it was changing and the limited information available.
The Committee discussed the reasons for an expected pick-up in growth over 2020, including monetary and fiscal stimulus and the high terms of trade.
The members noted the Government’s announcement in December that it plans to invest more over the projection period. The Committee discussed that the impact of fiscal stimulus could be greater than assumed. This risk was balanced by potential delays in implementing approved spending and investment programmes.
The Committee noted that household spending growth was expected to accelerate due to lower interest rates and rising household wealth. Some members noted that the increase in consumption growth could be more persistent than projected.
The members noted that the high terms of trade has partly offset the effect of slower trading-partner growth on the New Zealand economy. Some members noted that export prices could ease by more than projected given some of the temporary factors lifting meat and dairy prices.
The Committee noted the strong labour market, and agreed it was an expected outcome of monetary stimulus. The members discussed the contribution of the tight labour market to wage pressure and any flow on to consumer price inflation, and noted the effects of recent minimum wage increases, pay equity settlements, and large collective agreements in public sector. Some members noted the potential for further upward wage pressure.
Although GDP growth was expected to rise, some members noted downside risks to near-term production.
The members noted the signs of stabilisation in global growth and that trade tensions had receded somewhat. However, they noted these signs were early and tentative and they agreed the coronavirus outbreak was a risk to global growth in 2020.
The Committee discussed the challenges facing the rural sector and the impact on the rest of the economy. The members noted the changes to environment policy, tightening credit conditions over 2019, recent dry conditions in parts of the North Island, floods in Southland, and the coronavirus outbreak. The members discussed how these challenges could dampen economic activity.
The members discussed the business investment outlook and noted that business sentiment remains low despite its recent improvement. The members noted that stretched capacity in the construction sector could see government projects compete resources away from the private sector, but they also noted the opportunities that new infrastructure creates for total investment. The members noted upside and downside risks to the business investment outlook.
The Committee discussed the initial assumption that the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration. The members acknowledged that some sectors were being significantly affected. They noted that their understanding of the duration and impact of the outbreak was changing quickly. The Committee discussed the monetary policy implications if the impacts of the outbreak were larger and more persistent than assumed and agreed that monetary policy had time to adjust if needed as more information became available.
The Committee discussed financial stability risks from ongoing low rates. The members noted the Bank’s assessment that marginal changes to the OCR would not materially affect these risks at this time.
The members discussed the better mix of policy stimulus in the projections, given additional fiscal stimulus is reducing the burden on monetary policy.
The Committee discussed alternative OCR settings and the various trade-offs involved. The Committee agreed that ongoing low interest rates were needed to keep inflation and employment close to their mandated targets.
The Committee reached a consensus to keep the OCR at 1.0 percent.