OCR on hold at 1%, despite uncertain economic risk of Covid-19

The Reserve Bank of New Zealand (RBNZ) has today (Feb 12) kept the official cash rate at 1%, quashing predictions among some economists that the spread of coronavirus would lead to a rate cut.

While RBNZ Governor Adrian Orr acknowledged that the emergence of coronavirus – now named Covid-19 – does pose an economic threat, he said the Bank believes the risk will be short term in New Zealand.

But in a press release following the rate announcement, the Monetary Policy Committee said that the virus complicates meeting inflation and employment objectives, given how quickly it is changing and the limited information available.

“There is a risk that the impact will be larger and more persistent. Monetary policy has time to adjust if needed, as more information becomes available,” Mr Orr said.

In the media conference following the rate announcement, he said that the impact of Covid-19 in New Zealand is expected to be largely felt over approximately a six-week period, and that travel will pick up in March. This working assumption follows input from health and trade experts.

The impacts will also largely be industry specific, with travel disruptions directly impacting the tourism sector, Mr Orr said.

However, he acknowledged that some sectors have already felt a significant impact, with reports that some Queenstown tourism operators have experienced about a 25% reduction in trade during a peak visitor period.

Global economy shows signs of stabilising, NZ employment levels high

Meanwhile, the global economic environment is showing signs of stabilising and trade tensions have receded, he said. In 2019, a slowdown in economic growth offset domestic growth.

Business confidence has also been subdued, however it’s now showing signs of improvement. This is in part thanks to the government’s announcement of a $12 billion cash injection into infrastructure.

In New Zealand, the employment level is at, or slightly above, a sustainable level. Consumer Price Inflation is close to the 2% mid-point of the RBNZ’s target range. Economic growth is expected to pick up in the second half of 2020, following growth in trade and government investment. There are also indications that household spending will increase.

What does the rate hold mean for your back pocket?

While some commentators expected a cut, Canstar New Zealand General Manager Jose George says the decision to hold was not a huge surprise. He adds that the low rate environment for home loans could give homeowners the upper hand.

“Home loan rates are at historic lows and the market is fairly competitive, so this is a good time for mortgage holders to consider redrawing on their mortgages – for example for renovations – renegotiate their rate, or increase their repayments,” Mr George says. “And for those looking to get on the property ladder, especially first home buyers, this announcement should not detract them from their plans.”

Unfortunately, the news isn’t quite as positive for savers. Whether you’re saving for a first home deposit or, like retirees, are dependent on interest income on savings, the announcement to hold the OCR will bring little comfort.

Instead, Mr George suggests savers will steer toward longer term savings.

“These include choices such as KiwiSaver, and similar forms of managed funds or, in some cases, direct investment in the primary or secondary market, chasing higher returns albeit at higher risk levels,” Mr George says.

How can businesses stay viable in the wake of Covid-19?

Mr Orr said that diversification is crucial to any business strategy, but is particularly important following events that have a negative impact on business, such as Covid-19.

He stressed that if they’re not already, tourism businesses need to look at what they can do in the domestic market to help them recoup the loss of revenue from international visitors.

He also said that businesses should “over-communicate” with the government on what support is available, through agencies such as the Inland Revenue Department and the Ministry of Social Development.

What is happening with New Zealand’s property market?

Mr Orr added that New Zealand’s housing supply is starting to pick up, balancing out supply and demand, but that housing affordability remains an issue for some.

He also said that it’s important that buyers “stress test” themselves, to check that they will still be able to meet repayments should rates increase.

Currently, home loan rates are low – and they are expected to remain low for some time – but they won’t stay that way forever, Mr Orr said.

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