RBNZ Signals It’s Done Easing Rates Unless Virus Hits Growth

(Bloomberg) -- New Zealand’s central bank left interest rates unchanged and signaled it won’t need to cut them further unless the coronavirus has a bigger-than-expected impact on economic growth.

“We assume the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration, with most of the impacts in the first half of 2020,” the Reserve Bank said Wednesday after holding the official cash rate at 1%, a record low. “There is a risk that the impact will be larger and more persistent. Monetary policy has time to adjust if needed as more information becomes available.”

The RBNZ is juggling upbeat signals from a recovery in the housing market, a lift in inflation and falling unemployment against the risk that the virus, which is already hurting tourism, could significantly hamper growth. The RBNZ trimmed its first-quarter growth forecast but raised its projections for full-year growth and the cash rate, suggesting it no longer sees a chance of further easing.

“We think the improvement in underlying economic conditions means the RBNZ’s easing cycle is now over,” said Ben Udy, an economist at Capital Economics in Singapore. “The bank emphasized that there was still time to cut rates to support the economy if needed at a later date. But for now, the impact of the coronavirus was expected to be short-lived.”

The New Zealand dollar jumped as much as 1.1% after the announcement as some traders expected the bank to leave the door open to further easing. The kiwi bought 64.64 cents at 4:33 p.m. in Wellington. The yield on 10-year government bonds rose 11 basis points to 1.39%.

The RBNZ’s new projections show the average OCR staying at 1% through 2020, and starting to increase from mid-2021. Previously, the track fell to 0.9% this year, implying some risk of a cut.

The monetary policy committee “noted that employment was at or slightly above its maximum sustainable level while consumer price inflation was close to the 2% target midpoint,” according to a record of the meeting also published Wednesday. A report last week showed the jobless rate fell to 4% in the fourth quarter, matching a decade low, while annual inflation accelerated to 1.9% in the final three months of last year.

“Low interest rates remain necessary to keep employment and inflation around target,” the bank said. “Economic growth is expected to accelerate over the second half of 2020 driven by monetary and fiscal stimulus, and the high terms of trade.”

What Bloomberg’s Economists Say

There’s no way the Reserve Bank of New Zealand could know whether they need to cut rates in response to the evolving Coronavirus outbreak. A lot has gone right for the RBNZ since the November Monetary Policy Statement. But it remains to be seen whether the positive domestic developments since November will be derailed by the effects of the virus. We remain of the view that the balance of risks lies with the RBNZ being dragged across the line into further easing later this year.

James McIntyre, economist

While trimming its first-quarter growth forecast to 0.4% from 0.7%, the central bank revised subsequent quarters higher. It now sees growth in 2020 of 3.1% compared with 2.8% previously, which is more optimistic than most private-sector economists.

“We struggle with the concept that the economy grows at 0.9% per quarter” in the final nine months of 2020, said Stephen Toplis, Head of Research at Bank of New Zealand in Wellington. “Growth is likely to surprise to the downside with or without the coronavirus.”

Some analysts also expect the virus will cause a much sharper slowdown than the RBNZ is assuming. ASB Bank this week forecast the economy could contract in the first three months of the year as the nation’s borders are shut to Chinese tourists during the peak season, and plant closures stem the flow of goods and services into China.

The RBNZ assumes the economy will grow faster than its potential growth rate from mid-2020 but doesn’t project a sharp rise in prices. It expects inflation to slow to 1.7% by early 2021 then pick up to around its 2% goal over the remainder of the forecast period.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

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

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