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Coronavirus: NZ's largest bank says three OCR cuts now likely by May

Author
Liam Dann, NZ Herald,
Publish Date
Mon, 2 Mar 2020, 11:24AM
Coronavirus is expecting to hit the world economy hard. (Photo / AP)
Coronavirus is expecting to hit the world economy hard. (Photo / AP)

Coronavirus: NZ's largest bank says three OCR cuts now likely by May

Author
Liam Dann, NZ Herald,
Publish Date
Mon, 2 Mar 2020, 11:24AM

ANZ economists now expect the Reserve Bank of New Zealand to cut the OCR 50 basis points in March and a further 25 basis points in May, taking the OCR to just 0.25 per cent.

"A marked global slowdown is guaranteed, due to both demand and supply disruptions. Our forecasts assume New Zealand GDP stalls in the first half of the year, with a gradual recovery from there," said ANZ chief economist Sharon Zollner in her latest weekly outlook.

"But although New Zealand is better placed than many countries to weather this shock, we see clear risks of a larger slowdown or even recession."

Economist had stayed reasonably optimistic about the economic impact of the outbreak until about a week ago when the number of cases jumped outside of China.

In its last Monetary Policy Statement on February 12 Reserve Bank Governor Adrian Orr and his team played it cool,holding the official cash rate at 1 per cent and parking the epidemic in the "downside risk" basket.

However if the outbreak does prove worse than expected - if it spreads more widely outside China or remains disruptive into the second quarter of the year - then "monetary policy had time to adjust", they said.

Last week stock markets slumped sharply in to correction territory - down10 per cent - as concern about the global spread grew.

"When the facts change, we change our minds. And the facts are changing fast," Zollner said.

"The economic impact of the COVID-19 outbreak is now looking impossible for RBNZ to look through, as it becomes clear it won't be brief."

ANZ downgraded its growth forecasts last week in light of the continued global spread,
assuming more widespread economic impacts, including softer domestic demand and a more gradual recovery."

"But already, these forecasts are looking out of date, given the spread of the virus since then, the presence of the virus in New Zealand, established community outbreaks in the US, and the violent sell-off in global financial markets," Zollner said.

"A sharper global slowdown is on the cards."

Zollner said she was still hopeful that China's activity could continue to recover over coming weeks, but that it was likely to be gradual, given the painful trade-off between restarting the economy and containing the virus.

"Even once China is back to something like normal production, it will take a significant amount of time for distribution backlogs and supply chains disruptions to resolve. Plus, even if industrial activity resumes in China, consumer and firm behaviour will take longer to truly normalise."

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