MNI: RBNZ Slashes Key OCR 25 Bps to 0.25%

     LONDON (MNI) - The Reserve Bank of New Zealand cut its key interest rate by

75 bps to 0.25%, saying the rate will remain at that level for at least 12

months.

     The full text follows:

     The Official Cash Rate (OCR) is 0.25 percent, reduced from 1.0 percent, and

will remain at this level for at least the next 12 months.

     The negative economic implications of the COVID-19 virus continue to rise

warranting further monetary stimulus.

     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.

     Financial market pricing has responded to these events with declining

global equity prices and increased interest rate spreads on traditionally

riskier asset classes.

     The negative impact on the New Zealand economy is, and will continue to be,

significant. 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.

     Several factors will continue to assist and support economic activity in

New Zealand.

     New Zealand's financial system remains sound and our major financial

institutions are well capitalised and liquid. The Reserve Bank is also ensuring

that the banking system continues to function normally.

     The Government is operating an expansionary fiscal policy and has imminent

intentions to increase its support with a fiscal package to provide both

targeted and broad-based economic stimulus.

     The New Zealand dollar exchange rate has also depreciated against our

trading partners acting as a partial buffer for export earnings.

     And, the Monetary Policy Committee agreed to provide further support with

the OCR now at 0.25 percent. The Committee agreed unanimously to keep the OCR at

this level for at least 12 months.

     The Committee also agreed that should further stimulus be required, a Large

Scale Asset Purchase programme of New Zealand government bonds would be

preferable to further OCR reductions.

     More information:

     There will be no OCR Review on 25 March 2020 Record of Meeting The revised

OCR will be effective from 17 March 2020 A live-stream of a media conference,

with Governor Adrian Orr, will be available on the RBNZ YouTube channel at 11am

today. Record of meeting - Extraordinary OCR Review - 15 March 2020 Members met

for an extraordinary session of the Monetary Policy Committee on 15 March at

2.30pm. This meeting was called in response to the rapidly deteriorating

economic situation relating to COVID-19.

     Staff briefed the Committee on agreed Reserve Bank financial stability

measures that were to be announced in co-ordination with any monetary policy

decision. The Secretary to the Treasury outlined the broad scale of intended

fiscal policy measures in light of the deteriorating economic outlook.

     Staff presented indicative scenarios of the impact of COVID-19 developments

on the economy. However, it was noted that there is extreme uncertainty around

these estimates, and that risks had already shifted to the downside since the

scenarios had been finalised.

     It was agreed that, since meeting in February, the outlook for the economy

had deteriorated significantly as a result of the impacts of COVID-19. The

slowdown in the global economy would act as a serious headwind for the New

Zealand economy. International and domestic initiatives to limit the spread of

the virus would have a serious impact on travel and trade affecting both supply

and demand channels in the economy. It was agreed that the Government and the

Reserve Bank of New Zealand had a vital role to play in cushioning the economic

impact through fiscal, monetary and financial stability measures. The members

welcomed the Government fiscal response and the Reserve Bank's financial

stability measures.

     The Committee discussed the effectiveness of a monetary policy response

given the nature of the economic shock and agreed that a significant easing in

monetary policy was required in order to achieve the goals of price stability

and maximum sustainable employment. Such a response would also support

co-ordinated financial stability measures, and the upcoming announcement of

fiscal stimulus.

     The members discussed the broad range of Official Cash Rate (OCR) settings

that would be suitable. Staff briefed the Committee on the scale of policy

stimulus required given deteriorating global conditions and the impact of travel

restrictions. The Committee discussed the relative contributions of planned

fiscal and financial stability measures in consideration of the monetary policy

response. Staff also advised that an OCR of 0.25 percent was currently the lower

limit, given the operational readiness of the financial system for very low or

negative interest rates.

     Subsequent Committee discussion focused on two scenarios:

     a 0.5 percentage point cut in the OCR to 0.5 percent, followed by an

assessment of the rapidly developing COVID-19 situation, with the ability to

follow up with more stimulus as needed at the scheduled March OCR review A 0.75

percentage point reduction in the OCR to 0.25 percent. Members noted that lower

interest rates would likely support the soundness of the financial system - in

the context of the Committee's Remit.

     Given views on the required level of stimulus given the economic impact of

COVID-19, the committee agreed a 0.75 percentage point reduction in the OCR

would be a more suitable option.

     The Committee then discussed supporting this significant monetary stimulus

with forward guidance. Members agreed to provide forward guidance that the OCR

would stay at the level of 0.25 percent for at least 12 months. This guidance

would also provide clarity to financial market participants that a negative OCR

would not be implemented over this period.

     The Committee was also briefed by staff on additional monetary tools, and

which were likely best suited to providing additional stimulus, noting that the

recently published principles recognise the best tool depends on the particular

circumstances. Assuming markets are functioning effectively, staff indicated

Large Scale Asset Purchases of New Zealand Government bonds were the next best

monetary tool available to the Committee. The Committee agreed with this

assessment. However, the Committee agreed that additional tools were not needed

at this point.

     The Committee reached a consensus to:

     Cut the Official Cash Rate to 0.25 percent. Provide forward guidance that

the OCR would remain at 0.25 percent for at least 12 months. Agree that Large

Scale Asset Purchases of New Zealand government bonds would be the best

additional tool to provide further monetary stimulus in the current situation -

if needed. The committee agreed that the scheduled meeting of the Committee on

25th of March was no longer required.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com