Reserve Bank Governor Adrian Orr faces big coronavirus challenge

Reserve Bank Governor Adrian Orr must confront the prospect of a global economic shock when he delivers his first monetary policy statement of the year on Wednesday.

Economists all expect the RBNZ to take a watch and wait approach to the coronavirus outbreak which has shaken expectations for global growth this year.

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The official cash rate is expected to remain on hold at one per cent.

But how Orr and his team incorporate the coronavirus impact into economic forecasts, which were otherwise looking increasingly rosy, will be the focus for markets.

While last year saw the RBNZ team heading off a mild slowdown with carefully measured rate cuts, it faces a much greater level of uncertainty from coronavirus and inevitable impact on China's economy.

The coronavirus is already hurting local tourist operators and hitting prices for commodities like oil and copper and even milk powder.

China's economic growth will also be slower than expected, in the first half of the year at least.

But how long the outbreak lasts remains impossible to pick and economists say there is the possibility of strong rebound once it is resolved

That could still make final economic impact marginal when viewed across the whole year.

On that basis, expectations are that the Reserve Bank will stick with central forecasts made before the outbreak blew-up and deal with it as a stand-alone risk.

"We do not expect the RBNZ will have enough valid information to explicitly account for its impact in its published forecasts or OCR deliberations," said ASB senior economist Mark Smith.

He noted Orr's tendency to look for the path of least regrets in his analysis.

"When the outlook is uncertain but the economy appears well placed, the best course of action...is to wait for more information before deciding on a course of action."

Prior to the coronavirus outbreak a run of strong local economic data - including a rebound in business confidence and CPI inflation - had many economists moving expectations away from further rate cuts towards a neutral stance.

But ASB has retained it's forecast for one more rate cut this year, based on the possibility of the outbreak weakening the economy.

BNZ economist's have shifted their short-term GDP forecasts 0.5 per cent lower in the wake of the Chinese epidemic.

Westpac economists have estimated a 0.6 per cent hit to 1st quarter GDP.

"In the event that there is a quick resolution to the problem then a bounce back in the second half of this year might be anticipated," BNZ chief economist Stephen Toplis said.

"Conversely, there are probably greater risks that we are being conservative in our estimates of the impact."

Westpac chief economist Dominick Stephens described the situation as a "communications challenge" for the RBNZ.

It will need to convey three separate messages, he said.

• The New Zealand economy and housing market have exceeded the RBNZ's expectations recently, to the point that the OCR outlook would have shifted to "on hold" had coronavirus not emerged.

• If the coronavirus has a sharp but short disruptive impact on the economy, followed by a rapid recovery, then there would be little requirement for monetary policy to respond. This would constitute a "look through" event.

• Should coronavirus have a longer-lasting or more severe disruptive impact on the economy, then the RBNZ would probably cut the OCR.

While that might seem relatively simple in terms of a written narrative, what it would do to the RBNZ's forecasts for the official cash rate and the wider economy was "trickier to anticipate", he said,