Reserve Bank holds interest rate and assumes coronavirus impact will die down before July

Wednesday, 12 February 2020

No surprise this time from Reserve Bank governor Adrian Orr.

The Reserve Bank has left the official cash rate unchanged at 1 per cent, saying it had assumed the impact of the coronavirus would be short-lived.

The decision was expected by most economists, even though banks have slashed their near-term forecasts for New Zealand's economic growth because of the spreading coronavirus outbreak.

Infometrics economist Gareth Kiernan summed up the message the Reserve Bank had delivered to the economy as 'come back and see me when you are actually sick'.

The Reserve Bank said it assumed the overall economic impact of the coronavirus outbreak on New Zealand would be of 'a short duration' with most of the impacts in the first half of the year.

The New Zealand dollar gained about 0.6 US cents in the wake of the commentary, and was sitting at 64.6c during late afternoon trading.

The Reserve Bank says it would have time to adjust monetary policy settings if it was wrong in assuming the impact of the virus would mostly be over by the end of June.

* Coronavirus epidemic to shave $300 million off of New Zealand economy

* Coronavirus outbreak could shake a vulnerable global economy**

'Soft momentum' in economic growth had continued into early 2020, the Reserve Bank said.

But it expected economic growth would accelerate over the second half of the year 'driven by monetary and fiscal stimulus, and the high terms of trade'.

The outlook for government investment was stronger following the Government's announcements on infrastructure spending in December, it said.

'There are also indications household spending growth will increase.'

Kiernan said the bank's forecasts implied no further rate cuts, with the official cash rate starting to increase again from the second half of 2021.

ASB forecast on Monday that the New Zealand economy would shrink slightly in the three months to the end of March, after it lopped 0.6 per cent off its GDP forecast because of the virus outbreak.

The Reserve Bank acknowledged some sectors were being significantly affected by efforts to contain the virus.

Tourism, agricultural exports and the international education industry have been among those to feel the brunt so far.

The Reserve Bank said there was a risk that the impact would be larger and more persistent, but said that monetary policy 'has time to adjust if needed as more information becomes available'.

Estimating the economic impact of the outbreak was extremely difficult, its monetary policy committee said.

'Although history provides some guidance on reasonable assumptions, the eventual outcome will depend on how long the outbreak lasts, how widely the disease spreads, and how people, firms, and governments respond.'

Its economic projections were finalised a week ago and were based on a scenario where there was 'no substantial outbreak in New Zealand and the outbreak overseas is beginning to be contained by the end of February', with a 0.3 percentage point hit to first quarter GDP.

'Along with government agencies, we are closely monitoring the coronavirus outbreak and its impacts on New Zealand's economy,' it said.

'We will adjust monetary policy as needed to continue to meet our inflation and employment objectives.'

ASB chief economist Nick Tuffley said the surprise in Wednesday's announcement was the extent to which the Reserve Bank's forecast rate track had been lifted, implying a full 25 basis point hike by the end of next year.

He said that had caused his team to revise its prediction of another cut this year.

ANZ said it was assuming 'something a little larger, though also short-lived' from the coronavirus but that the bank was 'increasingly nervous', noting the Reserve Bank had not mentioned the implications if the supply of goods from China was significantly disrupted.

'There's suddenly a big black cloud on the horizon, and no one can tell what economic weather it will bring.

'We suspect the impact will last well into the second quarter at least, but it's fair to say that all estimates are highly uncertain and will be under constant review.'

The Reserve Bank had 'no more information than anyone else on how things will pan out from here', ANZ said.

But it said exchange rates – rather than interest rates – were the 'most important adjustment mechanism for this kind of global shock that hits exporters hardest'.