Economists expect Reserve Bank to follow Australia and US and cut cash rate

Economists think that the Official Cash Rate will drop below 1 percent in March.
Economists think that the Official Cash Rate will drop below 1 percent in March. Photo credit: Getty.

Two leading economists predict the Reserve Bank will follow its counterparts in Australia and the US and drop the Official Cash Rate later this month.

New Zealand's Official Cash Rate has sat at 1 percent since August. 

Following a half-a-percentage point emergency cut by the US in response to "evolving risks" and a 25 basis point cut to Australia's cash rate, a response here is overdue.

Kiwibank senior economist Jeremy Couchman, said that the bank now expects the Reserve Bank to "catch up" on the coordinated response of the Reserve Bank of Australia and US Federal Reserve. 

"We're expecting the Reserve Bank to respond in March and cut by 50 basis points," Couchman said.

Economist Shamubeel Eaqub said that as it is globally, coronavirus is a "significant shock" for New Zealand and the August cut is "long forgotten."   

"I think the RBNZ should have done it already," Eaqub said.

"The main channels would be a lower New Zealand Dollar and a confidence boost."

He said that current travel restrictions are affecting tourism - and high value, time-sensitive trade conducted by air - as well as imports and exports.

"New Zealand is reliant on imports for not just clothing, furniture and toys but also [in the] construction and manufacturing sectors.

"Supply chain disruptions mean we could be seeing many items running out of stock: this could lead to a cash crunch and production halt for some businesses," Eaqub added.

In a February economic indicators report, the New Zealand Treasury confirmed that the tourism industry is taking a big hit.  In 2019, visitor arrivals had slowed 0.7 percent - down 9.2 percent from China - and travel restrictions mean that visitor numbers will fall further.

The report also said that the ANZ World Commodity Price Index fell 9 percent in January, driven by weaker meat prices and the price of whole milk powder had fallen by 9 percent. 

Philip Lowe, Governor of Reserve Bank of Australia said in a statement on Tuesday that the coronavirus outbreak had made the short-term outlook for the global economy unclear - and global growth in the first half of the year will take a hit. 

"In most economies, including the United States, there is an expectation of further monetary stimulus over coming months," Lowe said.

The New Zealand Official Cash Rate currently sits at 1 percent, the Australian cash rate is  .50 percent and the Federal Reserve is between 1 and 1.25 percent.

The Reserve Bank of New Zealand is due to make an announcement on the Official Cash Rate on 25 March.

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