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RBNZ’s Orr Says New Covid Case Is Reminder of Risks Ahead

RBNZ’s Orr Says New Covid Case is Reminder of Risks Ahead

New Zealand’s central bank governor Adrian Orr said a new community case of Covid-19 in Auckland is a reminder of the uncertainties around the economic outlook.

“If the economy continued to grow and do what it’s doing, well that’s a beautiful world, but that’s a big if,” Orr told Bloomberg Television in an interview Friday. “So today’s news around Covid just puts it back into perspective. Be careful out there, be prepared, don’t run around on predictions.”

RBNZ’s Orr Says New Covid Case Is Reminder of Risks Ahead

New Zealand health officials asked people who work in downtown Auckland to stay home Friday while they trace the movements of a person who may have contracted coronavirus from within the community. The case comes just days after investors withdrew bets that the Reserve Bank will cut its official cash rate into negative territory next year given the economy’s strong recent rebound from recession.

While the RBNZ raised its growth and inflation projections in its Monetary Policy Statement this week, Orr cautioned that its outlook is based on an assumption that the country’s border will be fully reopened by 2022.

“Now that is a very bold assumption, and even with that assumption we are still having to maintain very stimulatory monetary policy with interest rates at record lows,” he said. “It shows the work that is ahead of central banks to keep inflation positive and to keep employment anywhere near a maximum sustainable level.”

The central bank has been “at pains to explain to people that we are creating scenarios, not projections of certainty,” Orr said.

‘Thinking Forward’

The RBNZ wants financial markets to be “thinking forward,” he said. “They know what we’re doing, they know what we have to achieve, they know the instruments we use, so I really do hope they are watching the same information.”

Orr said he has “a lot of confidence” that the RBNZ’s new funding for lending program will be effective at driving down borrowing costs. “It is such an invasive way into the banking sector to provide very low cost of funding. We’ll be on watch to make sure that’s passed on to borrowers and investors,” he said.

While purchases of foreign assets is a tool that remains on the table, “it’s not a preferred option,” Orr said.

“We don’t believe it would have a significant impact really in the long term,” he said. “It would have an impact on the liquidity, not necessarily the exchange rate. So that sits in the tool-basket, we want to keep it there because why rule out options. But we are very comfortable where we are with the funding for lending and the quantitative easing program we’re doing at present.”

RBNZ’s Orr Says New Covid Case Is Reminder of Risks Ahead

Asked about New Zealand’s booming housing market, Orr said that low interest rates were fueling “extremely high” asset prices and that the RBNZ was getting criticized for that.

“But we’ve got our mandate,” he said. “Monetary policy is not targeted at asset prices, it doesn’t have the tool-set to be challenging these asset prices. Our single challenge in New Zealand is we need more houses.”

Orr said the RBNZ will be watching for signs of improvement in the inflation and employment outlooks in coming months.

“To see that we’re going to have to look at a lot of intermediate indicators, probably particularly confidence, business investment starting to happen,” he said. “We can provide the environment, we can provide the liquidity, but we need people to step up and take that capital and go out and do the investing.”

©2020 Bloomberg L.P.