New Zealand slashes rates as prime minister warns of recession

WELLINGTON, New Zealand – New Zealand’s central bank slashed interest rates to almost zero on Monday, March 16, as Prime Minister Jacinda Ardern warned the coronavirus could have a worse economic impact than the global financial crisis.

The official cash rate, already at a record low of 1%, was cut to 0.25% in a surprise move designed to protect New Zealand from a virus-induced recession.

However, markets shrugged off the tactic – with the benchmark NZX 50 closing down 3.56% – and Ardern’s tone was pessimistic when she addressed reporters several hours after the announcement.

“The preliminary advice I received from Treasury this weekend is that the economic impact of the virus on New Zealand could be greater than the global financial crisis,” she said.

Pressed on whether that could mean a recession, as occurred in 2008, Ardern replied: “Well, based on that advice, obviously, because the GFC led to a recession.”

Ardern’s government is set to unveil on Tuesday, March 17, a multibillion-dollar stimulus package, which the Reserve Bank of New Zealand said would complement its rate cut.

The bank was not scheduled to make a monetary policy announcement until March 25 but acted early because of “the rapidly deteriorating economic situation relating to COVID-19.”

The bank warned “the negative impact on the New Zealand economy is, and will continue to be, significant,” pointing to curtailed global trade, travel, and consumer spending.

New Zealand has just 8 confirmed coronavirus cases and no fatalities, for a population of nearly 5 million. 

The government on Monday barred events of more than 500 people and restrictions kicked in forcing all international arrivals to self-isolate in a bid to slow the virus’ spread.

BNZ’s Stephen Toplis said the travel restrictions announced were a “game changer” that locked in a deep recession.

“But it just had to be done,” he said in a note to clients, estimating the impact on tourism and airports alone would wipe 2% off gross domestic product. (READ: Air New Zealand to axe flights, jobs over coronavirus)

He warned the first 9 months of 2020 could see New Zealand’s economy endure “one of the sharpest drops in living memory” and there was little the central bank could do about it.

“We don’t think lowering interest rates will make any difference to economic outcomes whatsoever in the current environment,” he said.

“Under the pressure of global financial markets, the bank felt it simply had to move and move big.”

Toplis expected Tuesday’s government stimulus package to be worth NZ$15 billion to NZ$20 billion ($9 billion to $12 billion).

He said the government balance sheet had the capacity to deliver the huge spending boost but it needed to be carefully targeted for maximum effectiveness in unprecedented circumstances.

“It’s time to batten down the hatches. This is going to be a very rough ride,” he said. – Rappler.com