Pressure mounts on RBNZ after US Fed cuts rates by half pct

Reserve Bank Governor Adrian Orr. Photo / NZ Herald.

More pressure is on the Reserve Bank of NZ to cut its official cash rate after the US Federal Reserve - in an emergency measure not used since the Global Financial Crisis - cut its fed funds rate by half a percentage point in response to the coronavirus outbreak.

Fed funds rate now sits in a 1.0 to 1.25 per cent range.

The New Zealand dollar briefly spiked by half a US cent to US63.25c after the cut, reflecting US dollar weakness.

The US central bank's move, which followed a cut on Tuesday by the Reserve Bank of Australia, puts more pressure on the Reserve Bank of NZ to cut its rate, which currently stands at 1.0 per cent.

Reserve Bank Governor Adrian Orr is set to deliver the next review of the official cash rate (OCR) on March 25.

ASB Bank had pencilled in a 25 basis point cut for the March meeting, "but given run of information and central bank action, we certainly wouldn't want to rule out a larger 50bps cut".

All the main commercial banks now expect a cut of at least 25 basis points, come March 25.

The US Fed, in a short statement, said the US economy remained strong.

"However, the coronavirus poses evolving risks to economic activity," it said.

"In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1.25 per cent.

"The committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy," it said.

The Fed's move follows the Reserve Bank of Australia's decision on Tuesday to cut its official interest rate by a quarter of a percentage point to 0.5 per cent, saying the coronavirus outbreak was having a significant effect on the economy.

The Fed's move failed to have the desired effect on the US stock market.

US stocks rallied initially on the rate cut news, then fell sharply, the Dow Jones industrial index finishing 785 points or 3 per cent lower at 25,917.

"The US equity market appeared to be spooked by the Fed having to do something as drastic as a 50 basis point cut," Imre Speizer, a senior markets strategist at Westpac, said.

Following the Fed's move, Speizer expected markets to start pricing in a greater probability that the Reserve Bank would also cut by 50 basis points.

ASB economists said a cut by the RBNZ before the scheduled review on March 25 would risk fuelling the air of uncertainty surrounding the outbreak rather than helping to calm it.

"In our view, moving in gradual and measured steps at scheduled meetings will have the greatest impact on shoring up domestic confidence," ASB chief economist Nick Tuffley said in a commentary.

"And where is the low point for OCR? Essentially, anywhere between 1 per cent and fractionally negative, depending on how prolonged the virus outbreak is, and the extent to which behavioural changes make a mark on the NZ economy," he said.

"Calm and measured responses by policy-makers, businesses and households are what will make a difference to how New Zealand navigates through this latest challenge," Tuffley said.

In a statement, the Reserve Bank said it would be releasing its "high-level principles" around how it would assess and use unconventional monetary policy tools if ever needed, next week.

The bank said Orr would give a short speech outlining the principles on March 10.

"The principles and speech will not discuss current economic conditions or the Reserve Bank's outlook for the Official Cash Rate," the bank said.

"The Bank remains prepared in its business continuity role to ensure a well-functioning financial system, including ongoing consumer and business access to credit and cash, liquidity to the banking system and a stable payments and settlements system," it said.