Reserve Bank of New Zealand keeps Official Cash Rate at 1 percent

Reserve Bank Governor Adrian Orr

Reserve Bank Governor Adrian Orr

The NZD presents a quite respectable 1% yield - considering the average low rate environment - thereby preserving some carry appeal, which is set to fade for its closest peer, the Aussie dollar (we expect a Reserve Bank of Australia cut).

This encouraged a greater sense of market risk appetite, benefitting the New Zealand Dollar as fears over the disease's ultimate impact on the global growth rate diminished.

The Pound New Zealand Dollar (GBP/NZD) exchange rate held steady this morning, with the pairing now trading around NZ$2.01 as the risk-sensitive "Kiwi" continues to be held back by rising concerns over China's coronavirus outbreak.

Analysts at TD Securities (TDS) offer their afterthoughts on Wednesday's Reserve Bank of New Zealand's (RBNZ) hawkish monetary policy decision.

"There is a risk that the impact will be larger and more persistent".

That is compared with the previous statements, where employment was said to be "around" the maximum sustainable level and inflation was "below" the target range.

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This is especially true for the most vulnerable including the very young, older people, and people with chronic health conditions. Flu season peaks in Feburary, but it can last until May, according to the CDC, so there's still time to get a flu shot .

"Low-interest rates remain necessary to keep employment and inflation around target".

Reserve Bank Governor Adrian Orr said monetary policy had time to adjust to the impact of coronavirus, if needed. The widespread travel ban may make it worse for New Zealand's economic growth, Prime Minister Jacinda Ardern commented.

But not before a sluggish start to the new year has been overcome. There were also indications household spending growth will increase, the bank said.

The Bank did cut Q4'19 GDP by 0.4% pts on slower business investment into year end 2019 and by 0.6%pts in Q1'20 on the coronavirus.

"Overall, the inflation environment is now looking a little firmer than the RBNZ had expected at the time of the last policy statement in November", said Satish Ranchhod, an economist at Westpac in Auckland.

"We assume the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration, with most of the impacts in the first half of 2020".

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