Bank gives word to keep OCR at 0.25pc
Finance Minister Grant Robertson has welcomed the Reserve Bank’s decision to cut the official cash rate (OCR) as well as reports the cut was likely to be passed on to bank customers.
‘‘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.
The bank cut the OCR to 0.25 per cent for the next 12 months, a cut of 0.75 percentage points.
It was made outside of the bank’s scheduled OCR reviews, with the next one due on March 25. That will now be cancelled.
Reserve Bank governor Adrian Orr said coronavirus developments over the past few days prompted the bank to cut the OCR. Although the central bank appears to lack a mechanism to make a formally binding commitment not to raise the OCR over the coming year, Orr said at a press briefing that its commitment not to do so was ‘‘the Reserve Bank’s word’’.
If further stimulus was needed, the bank said it would be more likely to use other unconventional monetary policy such as the large-scale purchase of government bonds.
The economy has been shaken by the impact of Covid-19.
‘‘The negative economic implications of the Covid-19 virus continue to rise warranting further monetary stimulus,’’ a Reserve Bank statement said.
‘‘Since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly.
Increasingly, governments internationally have imposed a variety of restraints on people movement within and across national borders in order to mitigate the virus transmission.
‘‘Financial market pricing has responded to these events with declining global equity prices and increased interest rate spreads on traditionally riskier asset classes.
‘‘The negative impact on the New Zealand economy is, and will continue to be, significant. 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.’’
The OCR cut is bigger than many had predicted. ASB chief economist Nick Tuffley had picked a cut of 50 basis points, which would have taken the rate to 0.5 per cent.
Economist Cameron Bagrie had warned that too much monetary policy stimulus now would leave little to help power the economy back into action when the coronavirus threat passed.
Infometrics chief forecaster Gareth Kiernan was unconvinced the cut would make a difference, given the downturn facing New Zealand.
‘‘To be fair, the Reserve Bank doesn’t have a great deal of leeway left to try to prop up the economy, which is precisely the concern we had given the very low levels that interest rates were still at in 2017 and 2018, nearly a decade after the Global Financial Crisis,’’ he said.
‘‘The [central] bank has essentially done what it can for now . . . The onus is now squarely on the Government to step up with a big support and stimulus package to mitigate the negative effects of the downturn.’’