The Reserve Bank has cut its benchmark interest rate by three quarters of a percentage point, to support the economy against the impact of the Covid-19 virus.

The central bank cut its official cash rate to a record low 0.25 percent from 1 percent.

Governor Adrian Orr said the cut was necessary to support businesses and employment.

“The negative economic implications of the Covid-19 virus continue to rise warranting further monetary stimulus.”

“Since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly,” he said.

The last time the RBNZ made such a big cut was in March 2011 after the Canterbury earthquake.

Central banks around the world have been cutting rates to counter the economic impact of the virus.

Orr said the monetary policy committee had decided the OCR would stay at the new low for at least 12 months, but it was reluctant to cut further.

“The Committee also agreed that should further stimulus be required, a Large-Scale Asset Purchase programme of New Zealand government bonds would be preferable to further OCR reductions.”

Last week, the bank outlined a range of unconventional monetary policy tools such as negative interest rates, special loans to banks, and buying bonds to put money into the economy.

The rate cut will complement the government’s planned economic package due on Tuesday, which is expected to detail specific assistance to businesses including wage subsidies, and cash grants.

The RBNZ has been at pains to say that monetary policy can have only a limited effect to counter the effect of the virus, but lower interest rates will reduce borrowing costs and encourage banks to lend to businesses, and ensure liquidity in the financial system.

The New Zealand dollar fell to a near-11 year low of 59.7 US cents.

The Reserve Bank is also giving retail banks a 12 month breathing space over new rules requiring them to increase their capital reserves.

The rules obliging banks to start beefing up their finances with more capital were due to come into force in July.

The Reserve Bank has delayed that for a year and says if necessary will push that out further.

Deputy governor Geoff Bascand said the delay was needed to support lending during a period of much uncertainty.

Banks will be expected to maintain lending to households and businesses, he said.

Westpac Bank has announced it will pass on the full interest rate cut to customers.

Finance Minister Grant Robertson told RNZ’s Morning Report the cut would provide some clarity.

“I certainly think it provides certainty for a lot of people, obviously a 75 … basis point cut, that is significant. One of the things we sometimes hear from trading banks is they’re not sure if they can pass on the impacts of a cut because they’re not sure whether it might bounce back up again or go down further,” he said.

“This says certainly that this is the position that they’re going to be in for some time, so [banks] can now work with their customers to pass on the benefits of the cut.”

“This has to be part of the picture, it does provide certainty for people but there is a lot more we also need to do.”

Robertson is set to announce a multibillion-dollar government support package tomorrow.

This article was originally published on RNZ and re-published with permission.

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