Coronavirus will lead to OCR cut this month: ANZ

The coronavirus outbreak could force the Reserve Bank to slash the official cash rate by 50 basis points this month, according to leading economists.

Monday, March 2nd 2020, 8:02AM

ANZ's team of economists, led by Sharon Zollner, say the "rapidly" escalating outbreak, which hit NZ last week, has led to "clear risks of a larger slowdown or even a recession".

The bank now expects a 50 basis point cut in March, and a further 25 basis points in May, taking the OCR to just 0.25%.

A move would likely see mortgage rates continue to plummet below record low levels.

The economists believe "a marked global slowdown is guaranteed" from the coronavirus, due to both demand and supply disruptions.

They added: "Although New Zealand is better placed than many countries to weather this shock, we see clear risks of a larger slowdown or even recession. Fiscal policy will need to do the heavy lifting, but lowering the OCR will ease financial pressure, facilitate a lower NZD, aid confidence at the margin, and support the recovery."

The epidemic, which originated in China, is widely expected to hit New Zealand GDP and business confidence, putting the brakes on a tentative economic recovery from the end of last year.

Last week saw the first official coronavirus case in New Zealand, with further cases expected as the virus continues to spread.

Financial markets are pricing in a cut by August, with a chance of more, the bank said. "We’re not quite over the line to call cuts yet," they added.

At last month's MPS, Reserve Bank governor Adrian Orr took a wait and see approach to the virus. Yet the worsening scale of the outbreak and impact on NZ's biggest trading partner, China, will cause great concern for the central bank.

ANZ's team said in a note last week: "This is a very complex shock, more like a war than a traditional economic slowdown, in that it includes massive disruption to the supply side of the economy, as well as to demand. It is impossible to forecast its impacts accurately. But it’s very clear they aren’t going to be anything good. And it’s increasingly clear that they aren’t going to be brief."

Independent economist Tony Alexander said NZ's tourism sector would face the biggest hit.

He believes a plateauing tourism sector could "turn into a deep downturn", affecting 65,000 jobs.

"We can anticipate layoffs in the tourism sector along with hospitality and sectors doing the likes of providing catering for airlines, food and drink to eating establishments, rental car services, campervans, Airbnb," he added.

Kiwibank economists stopped short of predicting a cut this month, but acknowledge the increased risk of further OCR cuts.

"We have held the view that another rate cut to 0.75% will be delivered on the back of the Covid-19 outbreak," they said. "We currently have a rate cut pencilled into our forecasts for August, with the chance of delivery in May."

The Kiwibank economists did not rule out a March cut of up to 50 basis points.

"In terms of size, a 50bp move may be preferred to 25bp. We wont rule anything out. To quote an ex-RBNZ official "When the economy is burning, you just keep throwing water at it, even if it evaporates"."

Tags: ANZ coronavirus OCR forecasts