February 12, 2020 / 1:54 AM / 8 days ago

NZ central bank holds rates, surprises markets with upbeat outlook

WELLINGTON (Reuters) - New Zealand’s central bank held rates at record lows on Wednesday, as expected, but sounded more confident on the economic outlook and dropped previous references to the chance of future cuts, sending the local currency soaring.

FILE PHOTO: Pedestrians walk near the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray/File Photo

At its first meeting of the year, the Reserve Bank of New Zealand (RBNZ) flagged new risks to the economy from the coronavirus epidemic in China but expected any impact to be limited.

While RBNZ held rates at 1% as expected in a Reuters poll of economists, the statement omitted a line used in previous policy statements that it would add further monetary stimulus if needed. It also delivered noticeably more upbeat comments about employment and consumer prices.

Orr said he expected the impact from the virus might only last about six weeks, based on guidance from other government departments, but that the RBNZ had room to adjust policy if the hit was greater.

“The working assumption is that travel bans are lifted and there is some renormalization over the month of March, with some lingering effects,” Orr said at a news conference after announcing the decision.

The central bank also raised the forecast path for rates this year to 1%, from 0.9% previously, removing the chance of a cut, and sending the New Zealand dollar NZD= up by 0.9% to $0.6460.

Widespread global travel and work restrictions due to the virus, which has so far killed more than 1,000 people and sparked a global health emergency, are putting the squeeze on New Zealand firms doing business in the world’s second-biggest economy.

New Zealand’s Prime Minister Jacinda Ardern said on Monday that the coronavirus epidemic would have an inevitable impact on economic growth.

“Overall, it looks like the RBNZ expects to keep the OCR on hold this year, unless coronavirus blows up into something severe for New Zealand,” said Westpac New Zealand Chief Economist Dominick Stephens.

‘INSURANCE CUT’

RBNZ said in its statement that economic growth is expected to accelerate over the second half of 2020 driven by monetary and fiscal stimulus, and the high terms of trade.

Wednesday’s monetary policy statement indicated a more upbeat employment and consumer prices expectations.

However, soft momentum in economic growth has continued into early 2020, it said.

Australia’s central bank held its cash rate last week and sounded doggedly optimistic even as markets bet devastating bushfires at home and China’s virus would force aggressive easing.

The RBNZ’s 75 basis point rate cuts last year helped it inch closer to its dual mandate of lifting inflation and increasing employment. Inflation in the previous quarter rose closer to the 2% midpoint of RBNZ’s 1-3% target range, while the unemployment rate dropped.

When asked about whether an “insurance cut” was considered by the policy committee to pre-emptively head off any virus hit to the economy, he said: “At this point, we didn’t see a need for a cut in the OCR with regard to a specific event.”

“We already have very low and stimulatory interest rates, we have a very good starting position with inflation at its midpoint, employment at maximum if not slightly above, global growth having stabilized,” said Orr.

New Zealand’s economy grew at a slightly below-expected 2.9% annual rate last year, as demand was partly hurt by the Sino-U.S. trade war.

Reporting by Praveen Menon and John Mair; Editing by Sam Holmes

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