12 Feb 2020

Reserve Bank of New Zealand keeps Official Cash Rate at 1 percent

5:24 pm on 12 February 2020

The Reserve Bank (RBNZ) has held its benchmark interest rate at a record low, but signalled it's ready to act if the impact of the coronavirus threatens the economy.

Reserve Bank governor Adrian Orr.

Reserve Bank governor Adrian Orr. Photo: RNZ / Dom Thomas

The official cash rate (OCR) was kept steady, as expected, at 1.0 percent.

Reserve Bank governor Adrian Orr said economic growth looks to be improving after last year's slowdown.

"Economic growth is expected to accelerate over the second half of 2020 driven by monetary and fiscal stimulus, and the high terms of trade," he said.

The OCR was cut twice last year from 1.75 percent to its current level, but the central bank signalled it then expected to be on hold for a considerable period.

Interest rate decisions are now made by a committee of four RBNZ staff and three outside members.

Virus impact short lived

The coronavirus was seen as an emerging downside risk, which would affect the economy.

"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," Orr said.

"Nevertheless, some sectors are being significantly affected. There is a risk that the impact will be larger and more persistent."

He said growth for the first half of the year would be slower because of the virus, with an expectation of 0.3 percent shaved off gross domestic product in the first three months of the year.

"Monetary policy has time to adjust if needed as more information becomes available."

The RBNZ's forecasts pointed to the OCR being held at current levels until late 2021 before modest rises in 2022.

The RBNZ has two key mandates - to keep inflation around 2 percent, and to maximise sustainable employment.

It said low interest rates had helped it get close to achieving both targets.

An economist said the RBNZ statement and forecasts were more upbeat than last year, even allowing for a possible short term hit from the coronavirus.

ASB chief economist Nick Tuffley said he was now scrapping a previous forecast of one more rate cut this year.

"However, the risks are clearly skewed to a cut over the next couple of OCR windows. Coronavirus uncertainties remain high and dry weather conditions are also a near-term risk."

The New Zealand dollar gained about half a cent against the US dollar after the decision, settling at around 64.5 US cents.

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