RBNZ Survey: Experts Say An Out-of-cycle Rate Cut May Cause Panic

• 90% of experts predict a rate cut on March 25
• OCR likely to drop below 1% for first time
• 27% say an emergency cut is needed to boost the economy, but some sceptical of effectiveness

Despite persistent rumours of an emergency rate cut, most experts believe that the Reserve Bank of New Zealand is unlikely to drop the official cash rate (OCR) until they next meet on Wednesday 25 March.

In the latest Finder RBNZ Official Cash Rate Survey, 12 experts and economists weighed in on the probability of an out-of-cycle rate cut in response to the escalating threat of COVID-19 (coronavirus).

An overwhelming majority (90%) agreed there won’t be an emergency cut before the next official cash rate (OCR) announcement. However this same number predict the next OCR decision will be a cut of at least 25 basis points. This would cause the OCR to drop below 1% for the first time in New Zealand’s history.

These findings are in contrast to last month’s Survey, where 23% of experts predicted a rate cut wouldn’t happen until August 2020 at the earliest.

Out-of-cycle rate cut may cause panic

This comes as the US Federal Reserve unexpectedly cut interest rates by 50 basis points on Tuesday 3 March— an emergency measure not seen since the Global Financial Crisis back in 2008. In addition, the Reserve Bank of Australia last week slashed the cash rate to 0.5%, a new historical low and the fourth rate cut since June 2019.

Yet many of the panellists say that an out-of-cycle rate cut on home soil would spark unnecessary fear amongst businesses and consumers.

According to independent economist Tony Alexander, an early rate cut “risks generating the sense of unease the RBNZ produced with its 0.5% cut last year.”

Kiwi Bank’s Chief Economist Jarrod Kerr agrees, saying an emergency rate cut would “signal panic in a world already on the verge of panic.”

Despite this, over a quarter (27%) of experts agree that an emergency rate cut is needed to boost the economy.

COVID-19 continues rapid escalation 

Kevin McHugh, Finder’s Publisher in New Zealand, said that the global spread of coronavirus has unfolded much quicker than expected.

“Last month, it was widely assumed that coronavirus would be contained within China. But this hasn’t been the case. The disease has since spread to more than 80 countries, with no signs of slowing down. This poses a major threat to the global economy,” he said.

Dr Oliver Hartwich, Executive Director at The NZ Initiative, said a rate cut is likely on 25 March as the Reserve Bank seeks to align with the monetary decisions of major international banks. Yet he also remains sceptical of the effectiveness of a rate cut, due to New Zealand’s heavy reliance on tourism and foreign trade.

“The RBNZ cannot create those tourists that will no longer arrive on our shores. It cannot restore supply chains either or stimulate the economies of our trading partners. Therefore, even as the cut looks unavoidable, I am not convinced it will be greatly effective,” he said.

Here’s what our experts had to say

Donal Curtin, Economics New Zealand Ltd: "There is, perhaps, some kudos from being seen to "do something", especially if seen as part of coordinated international effort post the off-schedule Fed move. But there are also risks of scaring the consumer and business horses ("if the RBNZ is worried so much ..." etc). Given that there's no material difference between moving now and moving on March 25, a hold until looks the more likely, though it's a close call."

Tony Alexander, Tony Alexander: "The economic and inflation outlooks have deteriorated as a result of the coronavirus outbreak and its potentially severe impact on the tourism sector. The manufacturing, construction, and farming impacts will be temporary."

Dr Oliver Hartwich, The New Zealand Initiative: "The coronavirus, or rather the response to the coronavirus, has disrupted the global economy. Especially following international interest rate cuts, the RBNZ has little choice but to cut as well."

Robin Clements, UBS NZ Ltd: "Response to the impact of COVID-19 and global central bank cuts."

Dominick Stephens, Westpac: "The RBNZ will deliver a confidence-boosting cut in reaction to COVID-19 and other central banks' actions."

Sharon Zollner, ANZ: "The COVID-19 outbreak continues to spread and accelerate globally, and imminent restrictions on the movement of people will severely hamper economic activity. Monetary policy can't do much about the situation, but will do its bit."

Michael Reddell, Croaking Cassandra: "For some reason they seem to eschewed moving quickly, in line with Fed and RBA, but coronavirus is a huge adverse shock, the economic severity of which the Bank will eventually wake to."

Jarrod Kerr, Kiwibank: "The RBNZ will likely follow the lead of central banks offshore in responding to the impact of the COVID-19 outbreak. I predict the next cut will be 50 basis points."

Debbie Roberts, Property Apprentice: "Although my previous prediction was no OCR cut until 2021, I now think that the global impact of COVID-19 will require the RBNZ to be pro-active with reducing the cash rate (maybe only by 0.25) on the 25 March in an effort to reduce the economic effect of the global spread of the virus."

Kelvin Davidson, Corelogic: "All due to coronavirus."

Christina Leung, NZIER: "Line-ball call on whether the RBNZ will wait till the official meeting given the moves of the other central banks, but think enough momentum in the NZ economy that RBNZ has time on its side."

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