Drought, coronavirus may drive RBNZ to cut OCR in March - Westpac

Westpac said drought and coronavirus may mean the OCR is cut next month. Photo / File

Drought and the coronavirus outbreak will deal a significant blow to the New Zealand economy over the first half of 2020, raising the possibility that the Reserve Bank may opt to cut its official cash rate as early as March, Westpac said.

"There is now a real possibility of the Reserve Bank cutting the official cash rate (OCR) in March, although at present we are maintaining our forecast of an August cut," chief economist Dominick Stephens said in a commentary.

Westpac now expects zero economic growth in the current March quarter, and annual 2.2 per cent annual GDP growth for 2020.

Without drought or coronavirus, the bank would have expected 0.8 per cent growth for the March quarter, and 2.7 per cent growth for the whole of 2020.

"This is all predicated on the assumption that coronavirus is eventually contained, but only at the cost of more severe and long-lasting disruptions to travel and trade than previously expected," Stephens said.

Coronavirus and drought are likely to have a net negative effect on inflation in the short run, he said.

"Drought and coronavirus are going to deal the New Zealand economy a sharp blow over the first half of 2020," Stephens said.

"Both situations have gotten more severe recently," he said.

However, the bank expects economic activity to quickly rebound from the drought and coronavirus-affected level.

"This means we can expect quite rapid rates of quarterly economic growth over the second half of 2020," Stephens said.

The Reserve Bank's next review of the OCR, which is currently set at 1.0 per cent, is due on March 25.