By Praveen Menon
WELLINGTON (Reuters) - New Zealand's central bank is expected to hold rates steady at its policy meeting on Wednesday, but strike a dovish tone as fears of a second wave of the coronavirus pandemic brings further economic uncertainty.
All economists polled by Reuters expected the official cash rate (OCR) to remain unchanged at 0.25% for the rest of the year, and at least some of them see rates moving to zero and negative territory next year.
The Reserve Bank of New Zealand (RBNZ) said in May that the cash rate will remain at 0.25% until early 2021, but it was working with commercial banks to prepare for negative rates in the future.
New Zealand was among the first countries to declare it was free of COVID-19, and opened its economy faster than most others. But those gains were lost last week as new coronavirus cases emerged, and fears of a second wave of infections are growing.
ANZ Bank said in a note that RBNZ would acknowledge activity bouncing back but also would point out that the country had not dodged a recession.
It would strike a balance between "an encouraging tone while still sounding suitably dovish" in order to keep the New Zealand dollar and monetary conditions low, Sharon Zollner said.
"The renewed strength in the NZD represents a meaningful
tightening in monetary conditions that will be decidedly unwelcome," she said.
The economy is in recession after GDP contracted 1.6% in the March quarter and expected to sink further in the next three-month period.
RBNZ would have to raise the NZ$60 billion ($38.5 billion) cap on its quantitative easing programme at some point, just to allow headroom for more stimulus to support the economy, Westpac said.
(This story has been refiled to add dropped name in sixth paragraph)