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Orr May Signal Readiness to Cut Rates as Virus Hits New Zealand Economy

Tuesday 11th February 2020

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New Zealand central bank governor Adrian Orr may signal he’s prepared to cut interest rates again to cushion the economic impact of the coronavirus.

The Reserve Bank will hold its official cash rate at a record low of 1% Wednesday in Wellington, according to all 24 economists in a Bloomberg survey. However, Orr is expected to indicate a readiness to act as the outbreak threatens to bring a halt to New Zealand’s tentative economic recovery.

“This is a highly fluid situation and estimated impacts are extremely uncertain,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “We expect the RBNZ will signal that they are staying on the sidelines for now, keeping the OCR on hold at 1%, but that they are watching developments closely and will respond as required if need be.”

There are fears the virus will curb demand for New Zealand commodities, particularly in largest trading partner China where the outbreak originated. It is already hurting New Zealand’s biggest export earner, the tourism industry, as Chinese visitors are barred from entering the country. Westpac Banking Corp. economists estimate the shock will reduce first-quarter economic growth to just 0.1% from a previous forecast of 0.7%, while ASB Bank projects a 0.1% contraction.

The odds of a rate cut later this year have risen to more than 50% from about 40% at the start of 2020, swaps data show. The RBNZ will publish its decision at 2 p.m. local time Wednesday and Orr will hold a press conference an hour later. The bank will also publish new forecasts for growth, inflation and the cash rate.

The virus has emerged as an economic threat just as New Zealand’s inflation picture was firming. The annual inflation rate rose to 1.9% in the fourth quarter, beating expectations and closing in on the midpoint of the RBNZ’s 1-3% target range. House-price growth is gathering pace, business confidence is beginning to recover from a slump and unemployment unexpectedly fell to 4%, matching a decade-low, amid signs of wage pressures.

“Overall, the inflation environment is currently looking a little firmer than the RBNZ had expected at the time of the last policy statement in November,” said Satish Ranchhod, an economist at Westpac in Auckland. Still, “we think this will have been overtaken by concerns about coronavirus,” he said.

ASB economists said viral outbreaks typically have a temporary impact on growth, and they currently assume a short-term hit to New Zealand GDP that won’t necessitate a policy response. The government has also announced a NZ$12 billion ($7.7 billion) infrastructure investment plan that may start to boost growth later this year.

“If, however, the virus reaches New Zealand or the global virus impacts turn out to be significant, additional policy support will be required,” said Mark Smith, senior economist at ASB in Auckland. “The RBNZ will move the OCR lower. Fiscal policy will also have a key role to play.”


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