RBNZ Slashes Rates in Emergency Move to Support Economy

(Bloomberg) -- New Zealand’s central bank slashed its benchmark interest rate by 75 basis points as strict border controls to curb the coronavirus look set to tip the economy into recession.

In an emergency move early Monday in Wellington, the Reserve Bank cut its official cash rate to 0.25% from 1% and said it will remain at that level for at least the next 12 months. Should further stimulus be required, the RBNZ said it would turn to quantitative easing for the first time in New Zealand history by undertaking large-scale purchases of government bonds.

“We are in uncharted territory economically,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “We see QE as inevitable in the near future and it will work hand in hand with fiscal policy. The spotlight is now firmly on fiscal policy to step up to the plate, with a very significant package expected tomorrow.”

Policy makers are responding to the severe economic disruption caused by the global spread of the coronavirus. The U.S. Federal Reserve this morning cut its benchmark rate by a full percentage point to near zero and said it will boost its bond holdings to cushion its economy from the outbreak.

Over the weekend, New Zealand’s government introduced what it said were some of the most stringent measures by a nation to control the spread of the virus, requiring almost every individual who enters the country, including citizens and residents, to self-isolate for 14 days.

“This will be a major economic disruption, most obviously for the tourism and travel sectors, but it will ripple through the economy more widely,” Westpac New Zealand senior economist Michael Gordon said. “At this point a severe recession is inevitable.”

Air New Zealand said Monday it is reducing flights across the board, with long-haul capacity cut by 85%. The airline is reviewing its cost base and will need to start the process of job cuts, it said. “For the coming months at least, Air New Zealand will be a smaller airline requiring fewer resources, including people,” Chief Executive Greg Foran said in a statement.

The RBNZ said its policy committee met Sunday and was briefed by the Treasury Secretary on the government’s intended fiscal policy measures. Finance Minister Grant Robertson is due to make a “multi-billion dollar” announcement on Tuesday.

Coordination

“The Government, through the Treasury, and the Reserve Bank have been working closely together to co-ordinate our actions as we respond to the economic impacts of COVID-19,” Robertson said.

RBNZ Governor Adrian Orr will hold a press conference at 11 a.m. local time. The bank’s scheduled rate review on March 25 has been canceled.

The New Zealand dollar fell below 60 U.S. cents for the first time since 2009 in early Monday trading before jumping on the Fed’s statement. It bought 61.01 cents at 10:11 a.m. in Wellington. Swap rates and government bond yields fell.

The impact of the virus on the economy will be significant, the RBNZ said in a statement.

“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,” it said.

Should further stimulus be required, the RBNZ said a “Large Scale Asset Purchase program of New Zealand government bonds would be preferable to further OCR reductions.”

“The commitment to hold the OCR down and signal bond purchases should help to suppress long-term interest rates,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “The RBNZ looks set to explore unconventional tools rather than to test the limits of the OCR. There will be considerable inter-play between monetary and fiscal policy. The government will be borrowing heavily to support the economy, and the RBNZ can effectively provide the funding.”

The RBNZ has also delayed the start date for increased capital requirements for banks to help support lending, estimating this will enable banks to supply about NZ$47 billion ($28 billion) more than would have been the case.

The RBNZ in December said it would require banks to increase capital buffers over a seven-year period to better withstand economic shocks, with the transition to start in July 2020. Today it delayed that start for a year.

“Should conditions warrant it next year, the Reserve Bank will consider whether further delays are necessary,” Deputy Governor Geoff Bascand said in a separate statement. “We are taking this action now to help support lending in the economy at a time when there is a lot of uncertainty. The Reserve Bank’s expectation is that banks will utilize this flexibility to maintain lending to households and businesses.”

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net, Tracy Withers, Michael Heath

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