Reserve Bank governor Adrian Orr has hosed down expectations of an emergency interest rate cut, talking up the ability of the Government to respond to the fallout of Covid-19.
In a speech at the Reserve Bank on Tuesday, the governor was not supposed to give any commentary on the state of the economy, as the impact of Covid-19 spreads to global supply chains and causes huge market volatility.
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But Orr, speaking in front of most of the monetary policy committee which makes decisions on the official cash rate talked up the state of the New Zealand economy heading into the impact of Covid-19 and promising there would be no "knee jerk" response.
"We will be watching very carefully for what is the appropriate monetary response we need to make, but we want to do that on the best and fullest information, not some knee jerk reaction because New Zealand doesn't need a knee jerk reaction. We're in a good space."
Over the past week economists have firmed in their view that the Reserve Bank will slash interest rates by up to 50 basis points at its next scheduled meeting on March 25, with ANZ hinting it could make the decision early through an emergency meeting.
Economist Cameron Bagrie said the speech suggested the interest rate response to the virus would be more moderate and that Orr wanted fiscal policy - government spending - to do the "heavy lifting" in the response to Covid-19.
"He basically hosed down expectations of a sizable interest rate cut and an inter-meeting one," Bagrie, who attended the speech, said. "He explicitly said, time is on our side."
Orr's speech was meant to outline the monetary policy measures the Reserve Bank could use to maintain demand and inflation if wholesale interest rates fall to zero, including negative interest rates, large scale asset buying (sometimes referred to as 'printing money') or intervening in the foreign exchange markets.
But Orr spent large parts of his speech focused on the scope of fiscal policy - government spending - to help demand and suggesting it was often more effective than lower interest rates.
"Here in New Zealand we're in this wonderful position where monetary policy is willing and able to do whatever matters, and fiscal policy is also in a strong and credible position [to respond]."
Orr said whether the response to any disruption in the economy was fiscal or monetary depended on the shock.
The recent drought across the upper North Island was one where the appropriate response was fiscal, with a supply shock needing targeted spending and assistance, with droughts rarely leading to a fall in aggregate demand.
Orr said - at least by the time the Reserve Bank met in February - the Covid-19 situation was the same in terms of the economic disruption, with a supply side shock triggering one-off issues, with little for monetary policy to do other than let market prices do their job.
This week Orr met with the bosses of New Zealand's largest banks, where they discussed not only the health of the payments system but also that "we're all in this together, and that cash flow and confidence will rule the day as we bridge our way through whatever disruption, however severe or not severe it becomes over the coming months".
Earlier, Prime Minister Jacinda Ardern revealed that the working capital measures the Government highlighted on Monday was some kind of extension of the assistance offered by the Export Credit Office, a unit of Treasure which helps underwrite the risk of exporting.
Bagrie believed the Government needed to help facilitate "some sort of supply chain finance arrangement" to help businesses re-establish links that had been disrupted by the virus and trade disruption.
"That could take a little bit of time to get up off the ground because we don't want to put the taxpayer at too much risk here," Bagrie said. "You're there to support, but you're not there to bail out bad business."