UPDATE 2-NZ central bank slashes rates by 75 bps over coronavirus fears

* RBNZ cuts cash rate to 0.25%

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

* Bank increased cap requirements delayed by 12 months (Recasts with more detail)

By Praveen Menon

WELLINGTON, Mar 16 (Reuters) – The Reserve Bank of New Zealand (RBNZ) slashed interest rates by 75 basis points on Monday, sinking the country’s currency, as it prepared for a “significant” impact on the economy from the coronavirus outbreak.

The unprecedented move follows rate cuts by central banks around the world, including the U.S. Federal Reserve and the Australian Central Bank, as the COVID-19 outbreak continues to disrupt trade, tourism and domestic production.

The bank cut the official cash rate (OCR) to 0.25%, and its monetary policy committee agreed unanimously to keep the OCR at this level for at least 12 months, RBNZ said in its statement.

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

“The negative economic implications of the COVID-19 virus continue to rise, warranting further monetary stimulus,” the bank said.

“Demand for New Zealand’s goods and services will be constrained, as will domestic production. Spending and investment will be subdued for an extended period while the responses to the COVID-19 virus evolve,” the statement said.

The negative impact from the virus on New Zealand’s economy is, and will continue to be, significant, it added.

The Committee also agreed that should further stimulus be required, it prefers to undertake large-scale asset purchases of government bonds rather than cut the OCR further.

The bank however said New Zealand’s financial system remains sound and major financial institutions are well capitalised and liquid.

“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.

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

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

The government plans to announce a significant business continuity plan on Tuesday with a fiscal package to provide both targeted and broad-based economic stimulus.

RBNZ said an extraordinary session of the monetary policy committee had been called on Saturday in response to the rapidly deteriorating economic situation relating to COVID-19.

RBNZ said it as has also decided to delay the start date of increased capital requirements for banks by 12 months, to July 1, 2021. (Reporting by Praveen Menon; Editing by Alexander Smith, Diane Craft and Jan Harvey)

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