March 16, 2020 / 1:47 AM / 5 months ago

UPDATE 5-NZ central bank slashes rates at emergency meeting as coronavirus worsens

* RBNZ cuts cash rate to 0.25%

* Agrees to keep OCR at this level for at least 12 months

* RBNZ governor says not contemplating negative interest rates

* Stronger prudential rules delayed by 12 months (Adds assistant governor comments in paragraphs 18-20)

By Praveen Menon

WELLINGTON, March 16 (Reuters) - New Zealand's central bank slashed interest rates by 75 basis points to a record low on Monday following an emergency meeting , sinking the country's currency, as it prepared for a "significant" hit to the economy from the coronavirus.

The unprecedented move follows rate cuts by central banks around the world, including the U.S. Federal Reserve, which cut interest rates to near zero on Sunday in another emergency move to help shore up the U.S. economy as the outbreak derails trade, tourism and domestic production.

The Reserve Bank of New Zealand (RBNZ) cut the official cash rate (OCR) to 0.25%, and pledged to keep it at this level for at least 12 months, the banks said in its statement.

RBNZ Governor Adrian Orr told a media conference the virus was expected to have a severe impact on New Zealand's people and economy over the coming year.

But he said the move was also to highlight that RBNZ was not at this point contemplating negative interest rates, even as the policy options for central banks dwindle globally.

"If a further stimulus was necessary at some point, which is not the case at the moment, we would consider using our additional tools, for example large scale asset purchases of New Zealand government bonds," Orr said at a news conference after the rate cut decision.

"Not all banks are ready for negative interest rates," he said, adding that banks were not asking for more liquidity.

The New Zealand dollar fell more than 2% at one stage after the surprise cut, but later recovered slightly, settling at $0.5985.

The rate cut and virus measures shook the New Zealand's corporate sector, with a number of companies suspending their earnings outlooks on Monday.

"Immediate and sizeable action was needed, and it brings the RBNZ into the line with the actions of central banks overseas," ANZ Bank Chief Economist Sharon Zollner said in a note.

ANZ said RBNZ was likely to move to unconventional policy as soon as was practicable.

The scheduled OCR review on March 25 has now been cancelled, the bank said.

ECONOMIC IMPACT

New Zealand Prime Minister Jacinda Ardern announced tough new measures on Saturday to protect the country against the virus by ordering everyone entering the country to self-isolate.

There are so far eight confirmed cases of coronavirus in New Zealand.

Orr said negative economic implications of the COVID-19 virus are becoming clearer and more significant.

"Global trade, travel and business and consumer spending have been curtailed significantly," he added.

However, he said New Zealand's financial system remains sound and major financial institutions are well capitalised and liquid.

RBNZ Assistant Governor Christian Hawkesby said the travel and social distancing restrictions put in place in many countries are likely to lead to medium-term global and domestic economic shocks. However, he said there was no immediate need to consider unconventional measures.

"If we wanted to have launched a large scale asset purchase programme today, we would have done it," Hawkesby told Reuters in a phone interview.

"We think those two things in addition to other announcements and fiscal stimulus from the government is the right thing to do for now."

The government plans to announce an economic stimulus package on Tuesday.

Orr said he expects the impact of this will lead to some business failures and some unemployment, adding that in some scenarios he sees the economy going into recession.

"It would harm a number of people in the New Zealand economy," he said.

RBNZ said it would also delay the start date of increased capital requirements for banks by 12 months to July 1 next year.

Reporting by Praveen Menon; Editing by Diane Craft, Jan Harvey and Sam Holmes

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