The Reserve Bank of New Zealand is a highlight for this week. The Monetary Policy Committee will begin meeting next week for the first time since November. Market pricing for RBNZ implies a near-zero chance of easing on 12 February, with a terminal rate of 0.85% (RBNZ OCR currently at 1.0%).
Understanding the impact of the global economy and its effects on New Zealand are critical to the Reserve Bank when it considers Monetary Policy. The Reserve Bank lowered the Official Cash Rate by 75 basis points in 2019, due in part to the slowdown experienced by the country’s trading partners. It will, therefore, be interesting to see how the central bank will balance their rhetoric when taking into consideration the risks associated with the coronavirus, despite a wholly improved domestic economic backdrop until this point.
Indeed, the Bank is likely to acknowledge better than expected outcomes for Gross Domestic Product, Consumer Price Index, wages and fiscal stimulus as positives but shy away from any overly ambitious outlooks when they have a very sick Chinese economy and a highly contagious virus on their doorstep.
BNZ to take its cues from RBA’s Lowe on coronavirus
This is a fast-moving situation and one might expect the RBNZ to rehash much of what Reserve Bank of Australia, Phillip Lowe, had to say on the matter when speaking last week when he downplayed how much monetary stimulus might be able to help Australia.
Troublingly, Lowe pointed out, however, that the coronavirus outbreak could do more damage to the Australian economy than 2003’s Sars outbreak, noting that China’s economy is now bigger and more integrated into the world economy so the impact is likely to be greater. “The potential risk to the Australian economy I think is bigger than Sars and the truth is really none of us know how this is going to play out,” Lowe said appearing before the House of Representatives economics committee in Canberra on Friday.
On Monday, the Shadow Board members deemed it prudent for the Reserve Bank to wait and see how the effects play out,” said Christina Leung, Principal Economist at NZIER – more here: Shadow Board recommends no RBNZ rate change this week. Indeed, there remains a wide range of views amongst the NZIER Policy Shadow Board on the appropriate level of the OCR due to the added uncertainty over how long the coronavirus will persist.
Meanwhile, in a speech to the Goldman Sachs Annual Global Macro Conference in Sydney, Reserve Bank Assistant Governor, Christian Hawkesby, set out the framework the Bank used to analyze the global economy and its influence on New Zealand. He said that the RBNZ was monitoring the impact of the coronavirus through all three channels. “The SARS virus in the 2000s provides some potential parallels, particularly through the effects on travel and confidence,” Mr. Hawkesby said.
He also stated that prolonged uncertainty, particularly around Brexit and US-China trade tensions, was likely to have affected business confidence and investment. “While New Zealand businesses cited a number of domestic factors, uncertainty about the global environment is likely to have also played a part,” Mr. Hawkesby said.
NZD/USD LONG (Buy)
ENTER AT: 0.6409