By Praveen Menon
WELLINGTON (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 COVID-19 outbreak continues to disrupt trade, tourism and domestic production.
The Reserve Bank of New Zealand (RBNZ) 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.
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.
The bank was not contemplating negative interest rates at this point, and the most effective tool at this time would be large scale asset purchases, Orr said.
"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 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 committee also agreed that should further stimulus be required, it would prefer 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 capitalized and liquid.
RBNZ said it would delay the start date of increased capital requirements for banks by 12 months to July 1, 2021.
"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 canceled, 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.