Reserve Bank cuts Official Cash Rate to record low 0.25 percent

The Reserve Bank has cut its benchmark interest rate by three quarters of a percentage point, to support the economy against the impact of the Covid-19 virus. 

On Monday, the central bank announced its decision to drop the Official Cash Rate to a record low 0.25 percent from 1 percent - the lowest point since the cash rate was introduced in March 1999.

Confirming that the cash rate will remain at 0.25 percent for a minimum of one year, Reserve Bank governor Adrian Orr says the cut is necessary to support businesses and employment.

"Since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly.

"Increasingly, governments internationally have imposed a variety of restraints on people movement within and across national borders in order to mitigate the virus transmission," Orr said in Monday's statement.

Coronavirus has - and will continue to have - a significant negative impact on the New Zealand economy.

"Demand for New Zealand’s goods and services will be constrained, as will domestic production.

"Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve," Orr added.

ASB chief economist Nick Tuffley said that a drop to the cash rate was inevitable, but Monday's hefty 75 basis point cut arrived quicker than expected.

"Mortgage rates are likely to fall in response," Tuffley confirmed.

The full effect of the cut is set to play out based on wholesale rate movements, and borrowers can look forward to a lengthy period of low mortgage rates.

"It's low and for much longer: it will be a good environment for borrowers," Tuffley said.

Shortly after Monday's announcement, ASB, ANZ, Westpac and Kiwibank confirmed that full extent of Monday's cut would be passed to borrowers.

Talking to The AM Show on Monday, Prime Minister Jacinda Adern said that businesses are looking for certainty - and Monday's cut delivers that.

"I think that's something that business at this particular time and place will be looking for," Adern said.

Referring to Monday's cash rate cut as a "welcome support for the economy", Finance Minister Grant Robertson said that the Reserve Bank had more room than many other countries to cut interest rates.

“The global outbreak of COVID-19 has had a significant impact on the world economy, which has fed through to New Zealand.

"We are working together – all arms of Government, business groups and unions – to protect jobs and businesses by cushioning the impact this global outbreak has on our economy," Robertson said.

Monday's decision to lower the Official Cash Rate effectively brings forward the Reserve Bank's scheduled review date of 25 March. 

It follows a half-a-percentage point emergency cut by the US Federal Reserve on 3 March in response to "evolving risks" and a 25 basis point cut to Australia's cash rate, to 0.50 percent on 4 March.

The Government is set to announce details of the COVID-19 economic relief package on Tuesday.