The Reserve Bank has shrugged off concerns about the impact of coronavirus, predicting the economy will pick up speed this year on the back of strong household confidence.
In its first interest rate review of 2020 the Reserve Bank not only left the benchmark official cash rate (OCR) unchanged at 1 per cent, but signalled that the next move was likely to be higher.
While economists had broadly expected the OCR to remain unchanged, markets were braced for warnings that the impact of the coronavirus could force it to cut this year.
However governor Adrian Orr predicted the impact "will be of a short duration, with most of the impacts in the first half of 2020" shaving around 0.3 percentage points off New Zealand's gross domestic product.
The statement sent the New Zealand dollar strongly higher, up around half a cent against the US dollar, with the estimate of the impact smaller than what several of the trading banks are now assuming.
Westpac says its base case is that coronavirus will shave around 0.6 per cent off New Zealand's gross domestic product, while ANZ has forecast a hit of around 0.5 per cent over the first half of the year.
But the Reserve Bank's working assumption is that the impact will begin to ease in March.
"We are looking at around a six-week hiatus disruption; the working assumption is the travel bans are lifted and there's some renormalisation over the month of March, with some lingering effects," Orr told reporters.
He acknowledged both that the virus presented a "downside risk" to its forecasts, and that
pockets of the economy, including tourism, forestry and seafood would be "deeply affected" but the bank was describing the overall picture.
Although the Reserve Bank acknowledged the assumptions it made on the virus could quickly prove to be wrong, the bank predicted economic growth would pick up this year, boosted by household spending.
Orr said the bank was assuming growth in consumer spending this year, with some members of the monetary policy committee predicting persistent pressure from consumption.
"People are employed, real wages are rising and that is being spent," Orr said.
A cut in the OCR in 2019 had boosted asset prices, in particular house prices, which was having flow-on effects.
"With house prices rising, that wealth effect is alive and giving and people will be more confident to consume and borrow to consume," Orr said.
The Reserve Bank was forecasting around a 7 per cent annual increase in house prices.
"While we're seeing some momentum, we don't believe it's going to be … as strong or as persistent as what we've seen in past house price asset cycles."
The Government gave details of a proposed $12 billion infrastructure "upgrade" in January.
Orr signalled this would end his pleas for fiscal support for monetary policy.
"We're not having any additional or ongoing public cries for more. We're very excited about seeing it put in place."
ANZ chief economist Sharon Zollner said the Reserve Bank would have been confident that the interest rate cuts of 2019 were working, but the emergence of coronavirus created a "big black cloud" on the horizon, which would have an uncertain impact on the economy.
Zollner said the bank could have cut the OCR "as an insurance move" just as it did after September 11, the Sars outbreak and the Christchurch earthquake.
"What's different this time is that the RBNZ has very little conventional ammunition left. Every bullet must be used judiciously."