Reserve Bank may not wait three weeks for 'coronavirus special' on interest rates

Monday, 2 March 2020

Reserve Bank governor Adrian Orr may be called into action early.

ANALYSIS: Don't be surprised if the Reserve Bank slashes the official cash rate by as much as 50 basis points within days.

The Reserve Bank isn't scheduled to make its next announcement on the official cash rate (OCR) until March 25.

But ANZ chief executive Sharon Zollner says the market is 'rife with rumours' that central banks are talking to one another about a coordinated rate cut in the wake of coronavirus contagion.

'Twenty-three days is an eternity when you are living in an exponential world,' she says.

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

What does the official cash rate mean?

* Would an OCR cut help vaccinate the economy?**

ANZ is not officially forecasting a cut before March 25, she says, but 'you can't rule out anything because the situation is evolving so rapidly'.

And if the Reserve Bank does implement what Zollner terms an 'emergency rate cut', she says there would be no point in it cutting the OCR by just 25bp.

'You may as well go harder to home.'

Reserve Bank spokeswoman Anne Apostol said it was continuing to monitor COVID-19 developments.

'The monetary policy committee will finalise its assessment on the day of the next OCR announcement.

'The next scheduled OCR review is on 25 March. If we were to deviate from schedule, we would make it public to everyone at the same time.'

The Reserve Bank was stuck in the waiting room last month when it decided to leave the OCR unchanged at 1 per cent, on the assumption that the coronavirus might still be quickly contained within China.

Its hope was that, in that scenario, the negative impact of the virus might be largely limited to New Zealand exporters exposed to the Chinese economy and could be offset through the exchange rate.

That may have been a sensible strategy at the time, but the health crisis has not played out according to the bank's early assumptions.

The New Zealand dollar fell to an 11-year low against the United States dollar on Monday, briefly dipping below US62c.

But the decline isn't very dramatic when viewed over the longer term.

The New Zealand dollar has been trading within a relatively narrow range in the 'sixty-something cent band' over the past five years.

The New Zealand dollar has fallen to its lowest level against the US dollar since 2009, but it is not clear how much extra relief exporters can expect.

Now that the virus has become a global problem, rather than a Chinese one, it is not clear how much extra relief might come from any further decline.

With aeroplanes and motels emptying, inflationary expectations are laughable and a 50bp rate cut could be in order simply to keep the bank's expansionary monetary policy constant, in real terms.

The biggest drawback of a rate cut is that it might fuel further house price rises, given there seems no particular reason why the virus would discourage people from pouring their available cash or borrowings into property.

That is disregarding the grim and hopefully remote possibility that the virus might result in a large enough number of deaths in New Zealand to meaningfully free-up housing supply.

On balance, the Reserve Bank would appear to have enough fresh information to make a call on at least a 25bp and perhaps a 50bp cut now, ahead of its scheduled OCR review on March 25.

Reserve Bank chief economist Yuong Ha noted last month that the option of moving early was there.

While an out-of-cycle rate cut might risk making some matters worse by inducing even more panic, Zollner says 'we are rapidly passing the point where central banks responding could conceivably damage confidence'.

'There is a general awareness we are in some kind of crisis already.'

There might be a few non-obvious advantages in the Reserve Bank acting right away.

Cutting the OCR ahead of the next scheduled review would make the point that was a 'coronavirus special' and not something that house-buyers and banks should be factoring into their longer-term thinking around budgets and mortgage rates.

An immediate rate cut while warranted on those grounds, would not be a miracle cure for the economy and it will soon be all eyes on the Government.

In January, you could smell the hot asphalt on the breath of some National Party politicians when Finance Ministry Grant Robertson announced his infrastructure spend-up.

But soon there will be no easy cash to burn a hole in the Government coffers.

Robertson was probably thinking he had at least another $3 billion to play with for new operational spending initiatives in the May budget, with 'wellbeing' initiatives such as mental health, tackling child poverty, and investing in skills and training, set to take priority.

The coronavirus gives the Government a legitimate excuse under its 'budget responsibility rules' for a deficit and higher borrowing, but it may now need to put its May budget together on the fly.

'The global reaction to the coronavirus outbreak justifies significant policy response,' Kiwibank noted on Monday.

'We expect the Government to come out strong, trying to backstop industries to the best of its ability.'

Meaningful help won't come cheap.