RBNZ to ask ‘whether enough has been done’ to OCR

WELLINGTON: The Reserve Bank’s monetary policy committee will ask ‘‘whether enough has been done’’ when it deliberates next week ahead of its scheduled interest rate announcement on February 12.

The central bank cut the official cash rate by 75 basis points to a record 1% last year.

‘‘The question for us now is whether enough has been done, and how confident we can be of sustainably achieving our dual policy mandate for inflation and employment,’’ assistant governor Christian Hawkesby said in a speech to the Goldman Sachs Annual Global Macro Conference in Sydney.

He noted financial markets had scaled back their pricing of further interest rate cuts in New Zealand.

In November, a 25basis point rate cut for February was 90% priced in; there was a 15% chance the official cash rate would fall to 0.5% sometime in 2020.

Now, markets saw a less than 10% chance of a rate cut in February and a 40% chance of a cut to 0.75% some time this year, he said.

Mr Hawkesby said his remarks did not represent the formal view of the committee.

The committee found it ‘‘useful’’ to split the impact of global shocks into three transmission channels: trade, financial markets and uncertainty.

By applying this framework to 2019, Mr Hawkesby said commodity prices for New Zealand’s primary products had held up while offshore funding costs were broadly steady. The New Zealand dollar declined, helping insulate the economy.

On the global trade front, if factors such as African swine fever and limited global dairy supply continued to support New Zealand’s commodity prices, there could be some upside for the terms of trade.

Additionally, any escalation of USIran tensions could lead to rising oil prices from a relatively low base, increasing import prices and further lowering the terms of trade.

Regarding the financial markets channel, ‘‘how banks respond to the final decisions of our capital review announced at the end of 2019 remains a key uncertainty’’, he said.

Late last year, the RBNZ announced decisions including banks’ total capital increasing from a minimum of 10.5% to 18% for the four large banks, and 16% for smaller banks.

On the uncertainty front, recent developments — including the UK election and the US-China phase one trade deal — had provided financial markets with some relief.

‘‘If there has been genuine pentup demand, the global economy could rebound strongly as firms catch up with capital spending,’’ he said.

However, ‘‘while financial market sentiment has improved . . . a sense of caution from businesses may continue for some time yet.’’

Mr Hawkesby also said the unfolding coronavirus outbreak was a human tragedy that needed to be monitored through all three channels.

‘‘The Sars virus in the 2000s provides some potential parallels, particularly through the effects on travel and confidence,’’ he said. — BusinessDesk

❛ If there has been genuine pentup demand, the global economy could rebound strongly as firms catch up with capital spending