The Reserve Bank has this morning cut the Official Cash rate to a record low 0.25 per cent as the coronavirus pandemic spreads.
The central bank lowered the benchmark interest rate by 0.75 per cent in a just-released announcement and said the new low rate would be in place for the next 12 months.
It was not scheduled to review the OCR until March 25, but has been under mounting pressure to act as the warnings about the impact of Covid-19 on the economy have become more severe.
The Wellington-headquartered Reserve Bank's move also comes after a string of other central banks have also lowered borrowing rates in a bid to boost confidence.
Also on Monday (NZ time) the US Federal Reserve took emergency action, slashing its benchmark interest rate by a full percentage point to nearly zero and announced it would purchase more Treasury securities to encourage lending to try to offset the impact of the coronavirus outbreak.
"The negative economic implications of the COVID-19 virus continue to rise warranting further monetary stimulus," the Reserve Bank said in a statement.
"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."
The Reserve Bank has also decided to delay the implementation of controversial new capital rules which would have required the banks to hold more capital on their balance sheets.
This, the bank said, would lead to another $47 billion in lending than would have been the case if the moves went ahead. Banks had long warned the move could stifle credit, especially in a time of economic strain.
"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."
ASB chief economist Nick Tuffley said the Reserve Bank, and the banking sector, were working to keep credit in the economy, with the Reserve Bank looking to buy bonds which "the Government is likely to need to issue heavily soon as it spends to prop up the economy".
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News that the cash rate will sit at its new level for a year is a new move for the Reserve Bank, which has been preparing for what it would do if wholesale interest rates eventually need to become negative.
The decision to cut the OCR so far so quickly was unanimous, the bank said.
Several factors "will continue to assist and support economic activity in New Zealand," the bank said, with the financial system remaining sound and the major banks well capitalised.
"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 NZ dollar was trading at 59.65 US cents at 7:45 am in Wellington versus 60.57 cents late Friday in New York ahead of the announcement. It was the first time the kiwi had dropped below US60c since the Global Financial crisis.
In its last Monetary Policy Statement on February 12 Reserve Bank Governor Adrian Orr and his team played it cool, holding the official cash rate at 1 per cent and parking the epidemic in the "downside risk" basket.
However, since then with the outbreak gaining momentum and spreading more widely outside China, the risks have escalated.
Banks urged to keep lending
Deputy governor Geoff Bascand said the situation around COVID-19 was still "evolving rapidly", hence the move to delay the need for banks to hold more capital.
"To support credit availability, the [Reserve] Bank has decided to delay the start date of increased capital requirements for banks by 12 months - to 1 July 2021," Bascand said.
"Should conditions warrant it next year, the Reserve Bank will consider whether further delays are necessary."
He added: "We are taking this action now to help support lending in the economy at time when there is a lot of uncertainty. The Reserve Bank's expectation is that banks will utilise this flexibility to maintain lending to households and businesses. Banks have significant buffers above current regulatory minimums, and we encourage them to use them."
The central bank was shelving other regulatory changes that could be delayed "to reduce the burden on financial institutions at this time of uncertainty", Bascand added. Such moves would be announced in the coming days.
Assistant governor Christian Hawkesby said the Bank was "ensuring there is sufficient liquidity in the financial system", through regular market operations.
"The [Reserve] Bank has a number of operational tools at its disposal to support liquidity and market functioning in New Zealand. This has helped the domestic cash market and foreign exchange swap market to continue to function effectively over recent weeks," Hawkesby said.
"Banks currently have robust liquidity and funding positions and can manage short-term disruptions to offshore funding markets. We will continue to monitor developments closely and engage regularly with market participants to ensure we are ready to provide support if needed."
The bank announced a series of immediate measures to help support liquidity to the banking system, including measures last used in the GFC.
Is the Reserve Bank now out of bullets?
The statement from the Reserve Bank strongly hinted that this was the final move for the OCR in a long time, and that it would look to other measures next.
Minutes of the monetary policy committee said that the next move would be a measure which commentators have sometimes referred to as "printing money".
"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," the Reserve Bank said.
Infometrics senior economist Brad Olsen said the statement indicated that the bank did not want to reduce the OCR to or below zero "and they will pursue any other option to avoid doing so at the moment".
Olsen said the indication of no move for the OCR until next year steered the market elsewhere.
"In effect, the OCR now becomes irrelevant for the next year. It's a non-starter. Not only does it not change, it's not even worth looking at."
The reference to large scale asset purchases meant the Reserve Bank would, in effect, be buying loans off the Government in a bid to get lending rates down.
Despite the move, the yield on Government leaped. According to figures from Bloomberg, the borrowing rate on 10 year bonds issued by the New Zealand Government jumped 18 basis points or almost 18 per cent to 1.2 per cent.
Olsen said the move to push back capital plans, which could have required the banks to increase how much capital they hold by around $20 billion in the coming years, raised questions about the plan in the first place.
The Reserve Bank estimated the move would have a major impact on how much was lent.
"Just looking at how staggeringly big the difference will be. The Reserve Bank itself noting $47 billion of additional lending than would have otherwise been the case, and it really does make you wonder," Olsen said.
"If the Reserve Bank's reason for putting this in was to ensure the viability of the financial system, to then reverse it when the viability of the financial system comes into question really does make you wonder about why we had such a large change coming through in the first place?"
'Deep' recession expected
Last week stock markets slumped sharply in to bear market territory as concern about the global spread grew.
Asked about the possibility of a recession, ANZ's chief economist Sharon Zollner said the bank expected "a deep one".
"We were already looking at a recession and the hit to tourism alone from the travel ban alone would be enough to cause a recession. But I would hasten to add that that is front loading a hit that was going to hit over the next month or two anyway, so at least this way, the sacrifice might have some meaning."
The government will today work out the details of a multi-billion dollar package aimed at helping workers, businesses, the healthcare system and society's most vulnerable.
Finance Minister Grant Robertson said the Reserve Bank's moves were a "welcome support for the economy", with reports already that banks are looking to pass the OCR cut on to customers.
"The Government, through the Treasury, and the Reserve Bank have been working closely together to co-ordinate our actions as we respond to the economic impacts of COVID-19," Robertson said.
Robertson said a "significant, multi-billion dollar fiscal response" to the virus would be released on Tuesday.
The RBNZ's announcement comes as two new cases of Covid-19 were confirmed - one in Wellington and one in Queenstown - taking the total in New Zealand to eight.
From 1am strict travel restrictions were put in place meaning all travellers not coming from the Pacific Islands now have to self-isolate for 14 days.