Markets see two RBNZ rate cuts this year

Reserve Bank Governor Adrian Orr. Photo / File

Worsening global sentiment over the spread of the coronavirus, or covid-19, has pitched New Zealand financial markets traders from expecting no interest rate cuts by the Reserve Bank in the foreseeable future to pricing in at least one and possibly two cuts to the official cash rate this year.

Forward pricing for ninety-day interest rates has fallen from around 1 per cent, where the OCR currently sits, to 0.7250 per cent by September this year, the month the election will be held.

"Point 75 (0.75) is where we would get with one rate cut, so the market is saying it believes there's a 100 per cent chance of a rate cut," said the Bank of New Zealand's head of research, Stephen Toplis.

And by the time of the November 11 RBNZ monetary policy committee meeting, markets are close to pricing a second 25 basis point cut, with the forward rate sitting at 0.6850 per cent mid-afternoon.

Just last week, Toplis and other bank economists were seeing the virus threat as being a potentially sharp, but likely short-lived, blow to global economic growth.

However, plunging and volatile stock prices on international equities markets since the beginning of the week, when it became clear to global traders that the virus would not be successfully contained, has significantly changed the outlook, Toplis said.

The S&P/NZX50 has fallen today by 1 per cent to 11599.31, after declining 1.2 per cent yesterday to 11,719.23.

The S&P/ASX 200 has also declined 2.2 per cent today, while Hong Kong's Hang Seng fell 1.5 per cent and South Korea's Kospi 200 is down 1.9 per cent.

While the virus is still known to be mild relative to the flu, and appears to losing momentum in China's Hubei province where the outbreak began last month, its appearance in Italy, South Korea, Iran and a range of other countries is significantly impacting global confidence about how long or deep a slowdown could be, based in part on contagious human emotion as much as the virus itself.

Finance Minister Grant Robertson earlier this week said the government was tracking the virus's economic impact using three scenarios. The first is a 'base case' where there is temporary but significant impact that unwinds relatively quickly.

The second is a "longer lasting shock" and the third the response to a global economic recession.

While global recession is not yet being widely discussed, a taskforce of government officials monitoring the outbreak are starting to move their forecasts to a U-shaped rather than V-shaped dip in activity, meaning that it may have a longer duration than anticipated as the virus works its way around the world.

Among speculation starting to emerge is postponement or cancellation of the Tokyo Olympic Games, not scheduled to occur until late August.

Dick Pound, the longest-serving member of the International Olympic Committee told the Associated Press today that the event might be cancelled if the outbreak was not under control by May.