RBNZ Sets Bullish Tone; Drops Chance of Rate Cut This Year

Daniel Fowler
February 15, 2020

As well as putting the kibosh on any idea that it might cut rates further, the RBNZ said annual growth is expected to accelerate to a 3.1 per cent pace in the December 2020 quarter.

According to the RBNZ, data from government departments reveal the Coronavirus impact to be evident on New Zealand's economy for six weeks only.

A report last week showed the jobless rate fell to 4% in the fourth quarter, matching a decade low, while annual inflation accelerated to 1.9% in the final three months of previous year.

Global ratings agency Standard & Poor's is forecasting that the virus - covid-19 - will shave 0.5 per cent off Australia's GDP in 2020, said Pat Gilligan, a director at Forex.

The New Zealand dollar retreated today after yesterday's surge caused by the central bank's monetary policy announcement.

"Low-interest rates remain necessary to keep employment and inflation around target". September 2019 GDP growth was 0.7%, compared to the RBNZ's forecast of 0.3%.

A return to positive growth territory for the manufacturing sector would limit worries over the outlook of the New Zealand economy, encouraging hopes of a stronger first quarter.

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Signs of a less robust labor market may put pressure on the RBNZ to implement lower interest rates, and Governor Adrian Orr and Co. may continue to emphasize that the board "will add further monetary stimulus if needed" as the International Monetary Fund (IMF) trims its global growth forecast for 2020.

"The market had not expected a move today, but the RBNZ did strike a more sanguine tone than expected, seeing the NZD and short-term yields spike", says Sharon Zollner, chief economist at ANZ.

Orr said the RBNZ considered an "insurance cut" to the OCR, "but didn't see the need". There are also indications household spending growth will increase. Indeed, it forecasts one hike by late 2021.

The New Zealand dollar was at 95.97 Australian cents from 95.99 cents at 5pm yesterday. The growth rate for infections and deaths is now falling but the Chinese economy remains largely at a standstill and the outbreak is far from over.

New Zealand's economy grew at a slightly below-expected 2.9% annual rate a year ago, as demand was partly hurt by the Sino-U.S. trade war. The RBNZ cautiously acknowledged that the virus is likely to temporarily hit growth during the first half of this year. With suspended corporate operations and over 1,000 casualties driven from virus outbreak in China, the global health emergency is likely to weigh on New Zealand's economy.

"There is a risk that the impact will be larger and more persistent".

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