When we look to the very beginning of 2020, most economists were going back on their previous words regarding the OCR dropping below the 1% mark (where it currently sits). Fast forward to March; no one could have predicted the impact of Covid-19 to our already slow level of growth.
According to BNZ’s latest Economic Outlook, at this stage there is no indication that the financial market is in imminent danger. However, the response from the US Central Bank to cut rates has only added to the state of panic that the world seems to be already in. BNZ does argue that the US’s decision to cut rates may not be because of Covid-19, but more around the equity market and to avoid the implicit tightening that a fall in equity prices may have.
So: where does that leave the New Zealand market? Our unemployment level is still at four percent and inflation is under control. Even if the market does slow down further, the RBNZ is prepared to see the unemployment rate move to at least 4.7% before taking drastic action.
Will the RBNZ cut the OCR in March?
We don’t think so. RBNZ Deputy Governor, Christian Hawkesby, stated publicly late last week, “cutting interest rates was the wrong response to the Covid-19 shock."
However, with the US’s decision to reduce rates, the RBNZ seems to have been forced to have a serious conversation about going down that same path. BNZ now predicts a potential cut of 0.25% in May this year, saying that a cut in March would be too irrational. We don’t quite know the extent of the impact that Covid-19 will have on the economy, but being a country that relies upon the global economy, we will have to make sure we’re adjusting accordingly.