2 Mar 2020

Covid-19 could force hefty Reserve Bank rate cut

11:53 am on 2 March 2020

Interest rates should be slashed by the Reserve Bank to counter the economic impact of the Covid-19 virus, according to the ANZ Bank.

The Reserve Bank of New Zealand

File photo. Photo: RNZ / Alexander Robertson

The worsening impact of the virus on New Zealand and global trade and economic growth justify a 50 basis point (half a percentage point) in the official cash rate (OCR) at the end of the month and a further quarter point cut in May, the bank's chief economist said in a weekly commentary.

"Our forecasts assume New Zealand GDP stalls in the first half of the year, with a gradual recovery from there.

"But, although New Zealand is better placed than many countries to weather this shock, we see clear risks of a larger slowdown or even recession," Sharon Zollner said.

"Fiscal policy will need to do the heavy lifting, but lowering the OCR will ease financial pressure, facilitate a lower New Zealand dollar, aid confidence at the margin, and support the recovery."

The RBNZ held the OCR unchanged at a record low 1 percent in February, saying it believed the virus would have a passing effect on the economy.

Zollner said the virus' impact on the economy is going to be more severe than originally thought, and the RBNZ might have to think about cutting the cash rate further and use other unconventional monetary policy measures.

She said there were broader and longer lasting impacts the virus might have, which would also justify cutting interest rates.

"Worryingly, there is a risk that there could be a breakdown in liquidity availability for the corporate sector; in this case, the outcome for bad loans, defaults, bankruptcy and employment could be severe."

Most of the companies listed on the stock exchange with strong trade and commercial links with China have so far reported little impact on their businesses from the virus.

Economic forecasters broadly agree there will be little growth for the economy for much of the first half of the year because of the virus and the impact of drought on some regions.

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