Analysis: RBNZ May Hold; Signal Easing Bias But Rate Cut Not Ruled Out

By Sophia Rodrigues

The Reserve Bank of New Zealand is likely to leave the official cash rate unchanged on Wednesday and signal an easing bias, though a 25 basis point rate cut cannot be completely ruled out.

While the RBNZ’s outlook will be consistent with an unchanged OCR of 1%, it would have to factor in increased risks and uncertainties to the outlook. In response, the RBNZ might decide to signal a dovish bias but it is also possible it would cut the OCR to guard against the emerging downside risks from coronavirus.

The RBNZ’s decision is due at 1400 hours New Zealand time on Wednesday.

In November, when the RBNZ last published its monetary policy decision, there was a debate between leaving the rate on hold at 1% and a cut to 0.75%. In the end, the Committee agreed both were consistent with the OCR projection and even as the rate was left unchanged, they noted the risks to the economy were tilted to the downside in the near term.

Since then, the economy and especially the exchange rate has performed in line with expectation. An important domestic development since then has been the large infrastructure spending announced by the government.

But offsetting that is new source of downside risk to the economy from coronavirus. While it is still too early to know how long this “human tragedy” will last, and what the economic impact would be, it is clear that New Zealand would be among the affected economies.

The most direct impact would be the trade channel, with both export prices and volumes of New Zealand goods likely to be affected.  Wholemilk powder prices fell by 6.2% to US$3,039 per metric. In November, the RBNZ had forecast prices to gradually return to US$3,000, so any further fall from here is a downside risk to the projections.

Tourism is expected to be significantly affected. In the year ended March 2019, tourism was New Zealand’s number one export but visitor numbers had flat-lined since the middle of 2019. This is likely to be further exacerbated by coronovirus impact.

A recent speech by RBNZ assistant governor Christian Hawkesby gives a good insight into RBNZ’s thought process. Based on the speech, it is clear the RBNZ’s current focus would be on the trade channel, and the uncertainty and confidence channel from the most recent global shock –coronavirus.

“In recent months, coronavirus is a human tragedy that has emerged that we will need to monitor, through all three channels,” Hawkesby said.

In the speech, Hawkesby made it clear that the RBNZ would not only look at the economic forecasts but also consider risks and uncertainties.

“We will also discuss and consider at length the risks and uncertainties to the economic outlook. A key part of that assessment will be, not only global developments, but how they are transmitted to New Zealand. Applying our three channel framework will help us with that assessment,” he said.