Coronavirus: Interest rate cut won't be enough to stop economic damage - economist

With speculation the Reserve Bank will drop interest rates to help the economy weather the coronavirus storm, one economist is warning it may not be enough on its own.

Reserve Bank Governor Adrian Orr isn't expected to deliver the next update on the official cash rate until March 25, but central banks in other countries aren't wasting any time. 

The US - which has 148 confirmed cases of COVID-19, but thousands more suspected - on Wednesday (NZ time) dropped its rate 0.5 percent to between 1 and 1.25 percent.

It's the first unscheduled emergency cut since 2008, CNN reported. Previous times an emergency cut has been made include the September 11 attacks and the bursting of the dotcom bubble. 

Cutting the rate makes it cheaper for banks to lend out money, in theory boosting economic activity.

Economist Shamubeel Eaqub said there is no need for Orr to hit the button early.

"I think we do have to move, but at the same time there is no need to panic," he told The AM Show on Thursday.

"The Federal Reserve cut rates by 50 basis points and the financial markets didn't really respond. So really, the Reserve Bank can take its time."

In fact, US markets continued to tank after the rate cut, the Dow dropping another 2.9 percent before recovering. It remains about 9 percent lower than it was before panic set in during the last week of February.

Eaqub doubts a rate cut here will do much anyway. 

"The kind of shock we're seeing to the economy is actually not very responsive to interest rate cuts. We're talking about cash crunch for businesses, we're talking about confidence loss. 

"In the latter part, the Reserve Bank could do some stuff, but I think that's much more of a role for the Government, particularly when it comes to things like public health and essentially giving the guidance that 'we are going to help businesses that are facing that cash crunch'."

Options being floated by the Government, he said - like rate cuts in the US - have been used here before in the wake of disasters. 

"Some of the responses they're talking about now are exactly what we used in Christchurch after the earthquakes - in terms of wage support, delays in taxes, giving very direct support to localised areas and localised industries. These are all things we know how to do. It's all about redeploying those resources - it's starting to happen."

Virus-hit Korea's stimulus package for example saw stocks rise 2 percent this week. 

Economists widely predict the US interest rate will go back to zero, where it was in the wake of the global financial crisis, if the virus continues to spread.

"Some argue that monetary policy can't fight the supply shock - but it will support demand and confidence," economist Tim Drayson told Reuters.

The Reserve Bank on Tuesday said it was monitoring developments.

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