- NZ has gone 100 days (as on 9 August) without reporting any coronavirus case but has been warned by health authorities to not become complacent due to resurgence of COVID-19 cases observed in a few nations that had controlled the virus.
- RBNZ announced an array of initiatives, as an answer to the coronavirus pandemic and gave markets a jolt by lowering its cash rate by 75 basis points in March.
- RBNZ is expected to hold its cash rate steady at 0.25% this year and restrict to a dovish tone by expanding quantitative easing beyond the current NZ$60 billion.
- Economic data suggests that the economic fallout of the pandemic is not as severe as was predicted.
With coronavirus ravaging the economies worldwide, governments and central banks are taking up widespread fiscal and monetary measures to fight the spread and economic fallout arising due to COVID-19.
Reserve Bank of New Zealand (RBNZ) has declared an array of initiatives as an answer to COVID-19 emergency. On the one hand, RBNZ chose to remove mortgage loan-to-value ratio (LVR) restrictions for a year; it also introduced a mortgage holiday, business finance support plans, and a more drawn out term financing plan for the banking system. It also launched weekly open market operations and implement a large-scale asset purchase program of NZ government bonds.
In the last policy meeting of RBNZ held on 24 June, the bank held its official cash rate at 0.25% and committed to persist with its Large Scale Asset Purchase (LSAP) programme, which is set at $60 billion, to keep its interest rates low.
The decision came on the back of NZ containing the spread of COVID-19 locally, permitting easing of social restrictions and an early resumption of economic activity than assumed in its May Monetary policy statement.
Further, the intended fiscal stimulus, announced in the May budget, was a little more than assumed, which has resulted in providing some confidence, but the bank asserted that substantial economic challenges still persist.
NZ records 100 days without coronavirus
On 9 August, New Zealand recorded 100 days sans any community transmission of COVID-19. However, the health officials cautioned that the country cannot let its guard down and there was no scope of complacency as nations like Vietnam and Australia, which also had the virus under control are struggling with a resurgence in the infection rates.
NZ, a country with population of 5 million, has become one of the safest places to live due to its success in battling coronavirus, and has gained widespread praise for the successful control of the disease. The first coronavirus case in NZ appeared on 26 February, the nation had recorded 1,219 cases of the virus. The country announced a state of emergency and went into lockdown on 25 March.
Consequently, RBNZ had cut its interest rate by 75 basis points to a record low of 0.25% in March to help shore up the economy amid preparations against a significant hit to the economy caused by the virus. The bank also pledged to keep the cash rate at the level of 0.25% for at least 12 months.
In late April, Prime Minister Jacinda Ardern stated that the nation had won the fight against widespread community transmission of the coronavirus for the time being. By 8 June, New Zealand seemed to have completely annihilated the disease after health authorities said that the last known contaminated individual at that time had recuperated. Subsequently, Kiwis have been living a near coronavirus free lifestyle, but with border restrictions, where all arrivals need to be quarantined for 14 days.
Expectations from RBNZ to expand quantitative easing
Reserve Bank of New Zealand (RBNZ) is scheduled to announce its next monetary policy on 12 August, wherein, it would declare its monetary policy settings, provide an update on its assessment into negative rates and publish its quarterly forecasts.
RBNZ is likely to hold rates steady at its upcoming policy meeting in the midst of progress signs in the economy. The bank is also anticipated to lay out its plans for future policy activity to soften the impact from the coronavirus pandemic.
The central bank is likely to stick to a dovish tone by increasing the size of its LSAP program from the present $60 billion and keep alternative monetary policy tools, including negative rates, strongly on the desk. Any signs on an inclination towards negative rates could put Kiwi dollar in pressure.
Liz Kendall, ANZ Senior Economist, stated that an expansion of the current quantitative easing programme would stay as the first choice of RBNZ to provide stimulus at the August Monetary Policy Statement, provided that it is efficient with minimum costs. She also added that RBNZ might increase quantitative easing to NZ$90 billion over 18 months.
Economic indicators suggest the need for more stimulus
Major economic indicators suggest that the impact of coronavirus has not been as severe as predicted, but more stimulus is needed to support recovery, While headline jobs data surprised to the upside in 2Q20, unemployment rate slid to 4% from 4.2% in the previous quarter, and the housing market remained resilient with a revival of business confidence.
However, the latest statistics of NZ for Q2 shows that 17,000 people have left the labour force in the second quarter, which resulted in a fall in the participation rate from 70.5% to 69.7, pulling the unemployment rate of NZ lower, indicating more people had chosen to leave the labour force amidst recession. Similarly, hours worked in NZ dropped 10.3% compared to the previous quarter with 81.4 million hours worked in Q2, with the figures expected to be much poorer without the wage subsidy scheme.
On the inflation front, CPI fell 0.5% in June 2020 and gained 1.5% year on year in 2Q20. The RBNZ Survey of Expectations, observed by the bank closely while taking monetary policy decision, has shown a recovery in 2-year inflation expectations to 1.43% in Q3.
RBNZ predicted headline unemployment rate to top 9% in 2020 and a gradual drop from 2021 onwards. It also expects the participation rate to fall to 69.5% and stay at that level until the second half of 2022 prior to begin recovery process.
With the expectations of inflation still below the 2% mid-point of RBNZ’s 1-3% target and cloudy jobs market situation, more needs to be fulfilled for NZ economic recovery to gain a firm foothold. Further, more easing is required by RBNZ amid the uncertainty of COVID-19 and global economic recovery.
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