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The Reserve Bank of New Zealand on Sunday pared its Official Cash Rate from 1.0 percent to 0.25 percent in response to the economic implications of the Covid-19 virus.
The rate will remain at this record low level for at least the next 12 months, the RBNZ said after its members came together for an extraordinary session.
Committee discussion focused on two scenarios: . A 0.5 percentage point cut in the OCR to 0.5 percent, 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. . A 0.75 percentage point reduction in the OCR to 0.25 percent.
Members noted that lower interest rates would likely support the soundness of the financial system - in the context of the Committee's Remit.
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.
Since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly. Increasingly, governments internationally have imposed a variety of restraints on people movement within and across national borders in order to mitigate the virus transmission.
Financial market pricing has responded to these events with declining global equity prices and increased interest rate spreads on traditionally riskier asset classes.
The negative impact on the New Zealand economy is, and will continue to be, significant. Demand for New Zealand's goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while the responses to the Covid-19 virus evolve.
Several factors will continue to assist and support economic activity in New Zealand. New Zealand's financial system remains sound and our major financial institutions are well capitalized and liquid. The Reserve Bank is also ensuring that the banking system continues to function normally.
The government is operating an expansionary fiscal policy and has imminent intentions to increase its support with a fiscal package to provide both targeted and broad-based economic stimulus.
The New Zealand dollar exchange rate has also depreciated against our trading partners acting as a partial buffer for export earnings.
The committee also agreed that should further stimulus be required, a Large Scale Asset Purchase program of New Zealand government bonds would be preferable to further OCR reductions.
