Reserve Bank cuts OCR in response to virus
The Reserve Bank has slashed the emergency official cash rate (OCR) from one per cent to 0.25 per cent, saying the economic outlook has “deteriorated significantly” in the wake of the coronavirus outbreak.
The cut will take effect from March 17 and the bank says it will remain at the historically low level for at least 12 months.
In a statement, the bank says if further action is needed it would adopt unconventional monetary policy and start buying government bonds rather than making additional reductions to the OCR.
The bank was due to make its next OCR decision on March 25 but brought that forward and held an emergency meeting on March 15 as the coronavirus pandemic increases the pressure on the economy.
It also comes hot on the heels of the government announcing everyone coming to New Zealand, including Kiwis returning home, would have to self-quarantine for 14 days.
The Reserve Bank says global trade, travel, and business and consumer spending have been “curtailed significantly” since the outbreak began.
“Increasingly, governments internationally have imposed a variety of restraints on people movement within and across national borders in order to mitigate the virus transmission,” it adds.
“Financial market pricing has responded to these events with declining global equity prices and increased interest rate spreads on traditionally riskier asset classes.
“The negative impact on the New Zealand economy is, and will continue to be, significant. Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve.
“Several factors will continue to assist and support economic activity in New Zealand. New Zealand’s financial system remains sound and our major financial institutions are well capitalised and liquid. The Reserve Bank is also ensuring that the banking system continues to function normally.”
Government support looms
The bank’s statement also points to government plans to announce a package on March 17 to help businesses worst affected by the outbreak.
Finance Minister Grant Robertson says the Reserve Bank’s decisions are a welcome support for the economy, especially as banks are looking to pass the full cut on to customers.
The Reserve Bank’s monetary policy committee (MPC) notes that an OCR of 0.25 per cent was the “lower limit, given the operational readiness of the financial system for very low or negative interest rates”.
It also says the outlook for the economy has deteriorated significantly as a result of the impacts of COVID-19 since its February meeting.
“The slowdown in the global economy would act as a serious headwind for the New Zealand economy,” the MPC says. “International and domestic initiatives to limit the spread of the virus would have a serious impact on travel and trade affecting both supply and demand channels in the economy.”
