New Zealand central bank official says coronavirus resurgence poses risks to outlook

[WELLINGTON] New Zealand's central bank will consider more monetary stimulus if there are periods of resurgence in local coronavirus infections and renewed lockdowns in the country, a top official said on Thursday.

Reserve Bank of New Zealand (RBNZ) Deputy Governor Geoff Bascand told Reuters the resurgence of the Covid-19 pandemic posed a big risk to its outlook as its baseline scenario has an assumption that the virus is contained in the country.

"This is a major risk to our outlook," Mr Bascand told Reuters in an interview.

New Zealand this week locked down its biggest city, Auckland, and reimposed social distancing rules across the rest of the country as new coronavirus cases were reported, ending a 102-day virus-free run.

"If we get periods of resurgence and have longer lockdown periods then the unfortunate consequence of that is we will see downside risks to our outlook...things will be worse. We would have to consider doing more in terms of our monetary stimulus," Mr Bascand said.

RBNZ expanded its quantitative easing programme on Wednesday and warned that policy rates might have to go below zero.

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Mr Bascand said if the bank has to add further stimulus beyond what was announced on Wednesday, it would go for a combination of negative interest rates and a "funding for lending" programme that lowers financing costs.

The programme will complement negative interest rates, he said, as it would reduce rates at which banks can borrow from the RBNZ and therefore allow them to pass on the rates more effectively.

"If we just do negative interest rates, there is some risk that banks tighten lending as it hurts their profitability a bit," Mr Bascand said.

The RBNZ stunned markets with a 75-basis-point cut in March as the coronavirus surfaced in the country, but has since left it unchanged.

Recent data indicates the economic impact of the pandemic was not as dire as first feared, due to early action that contained the spread of Covid-19. Still, that was not enough to prevent the economy's worst slump in nearly three decades in the first quarter.

Mr Bascand said while New Zealand is doing better domestically, the world has a difficult road back to recovery, which will impact the Pacific nation's recovery prospects.

"This is a big economic shock and its not over. It was a little bit of wonderful feeling when we had 100 days of containment, but its a long haul to recovery," he said.

REUTERS