RBNZ pulled out the bazooka on Monday – or, what counts as a “bazooka” if you’re RBNZ, I guess.
New Zealand slashed benchmark rates by 75bps to start the week, joining the RBA, the BOC, the BOE, Norges Bank and the Fed in easing policy to shield the economy from the economic fallout associated with the COVID-19 pandemic.
In addition to cutting rates to 0.25% from 1%, the forward guidance is strong – rates will remain at these levels for at least 12 months.
“The negative economic implications of the COVID-19 virus continue to rise warranting further monetary stimulus”, the bank said, in a statement. “Since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly [and] financial market pricing has responded to these events with declining global equity prices and increased interest rate spreads on traditionally riskier asset classes”.
With the ECB having expanded QE (and enhanced liquidity tools) and with the BoJ conducting unscheduled repos and likely to announce further measures soon, every central bank that “counts” (so to speak) has now taken some form of action.
Here’s an updated rate cut map for 2020:
For those interested in the details, there were two possibilities stemming from RBNZ’s “extraordinary” review, the bank said.
The first: A 50bps cut “followed by an assessment of the rapidly developing COVID-19 situation, with the ability to follow up with more stimulus as needed at the scheduled March OCR review”.
The second: A 75bps cut.
They chose the latter, and said Monday that “there will be no OCR Review on 25 March 2020”.
Here’s how the deliberations played out:
Given views on the required level of stimulus given the economic impact of COVID-19, the committee agreed a 0.75 percentage point reduction in the OCR would be a more suitable option.
The Committee then discussed supporting this significant monetary stimulus with forward guidance. Members agreed to provide forward guidance that the OCR would stay at the level of 0.25 percent for at least 12 months. This guidance would also provide clarity to financial market participants that a negative OCR would not be implemented over this period.
The Committee was also briefed by staff on additional monetary tools, and which were likely best suited to providing additional stimulus, noting that the recently published principles recognise the best tool depends on the particular circumstances. Assuming markets are functioning effectively, staff indicated Large Scale Asset Purchases of New Zealand Government bonds were the next best monetary tool available to the Committee.
As noted in that latter passage, the next move (should more easing be necessary) is QE.
The bank did say it’s not prepared to take that step at the current juncture, but it’s clearly on the table. Growth in New Zealand decelerated to the slowest since 2013 last year, in line with generally sluggish activity globally.
I’ve said it any number of times over the past two weeks, and I’ll just reiterate it here: You can’t subject a virus to death by a thousand rate cuts, but no one will be able to say that central banks didn’t try.
And remember, all of these cuts are coming after a year (2019) that witnessed one of the biggest net easing impulses since the crisis.
In other words, we are now firing the last bullets. And we’re shooting at a pathogen.