Too relaxed? How the Reserve Bank estimated coronavirus risk

Personnel wearing protective suits wait near an entrance of the Cheung Hong public housing estate in Hong Kong on Tuesday during an evacuation of residents. Photo / AP

Some critics have suggested the Reserve Bank was too relaxed about the risks of coronavirus in this week's monetary policy statement.

So how do you measure the economic impact of something as fraught with uncertainty as coronavirus?

The Reserve Bank this week delivered a cautious assessment of the epidemic, assuming the effects will largely be confined to the first quarter of the year and that it will knock around 0.3 per cent off GDP.

It left the official cash rate on hold at 1 per cent.

The Bank took a three-pronged approach to gauging local damage, says Reserve Bank economist Yuong Ha.

"We've had to challenge ourselves as to what's the framework," Ha said. "You don't want to be running around grabbing bits of information."

So the framework was to rely on three broad channels: the trade channel, the market channels and the confidence channels, he said.

"On the trade channel we're relying a lot on the people who are closer to the ground, the tourism bodies, Trade and Enterprise (NZTE) and MPI [Ministry of Primary Industries]," he said.

"They are ones that are in contact with industries, giving us insight into how their sectors are being directly affected."

The Reserve Bank team was directly monitoring market responses.

Sharemarkets are currently testing record highs on expectations of relatively quick resolution to the epidemic.

Ha said the Bank was wary of that.

"We have to be mindful of that, as new information comes to hand if they're building in an assumption that this thing is short duration but it turns out to be longer, how are they going to react?"

That could be built into modelling of assessments of overall business and consumer confidence, he said.

Although at this stage they hadn't seen the need to do that.

Reserve Bank of New Zealand chief economist Yuong Ha. Photo / Supplied

"So we've largely only taken in the direct hits to the export sectors, the new numbers for export prices and the exchange rate. Because we think it's going to be short duration [with] recovery pretty soon, we don't think there is going to be a massive downstream effect to confidence."

Ha said people shouldn't be looking to monetary policy as the "first line of defence against coronavirus".

"So the idea that we should be doing something and that the OCR is the best tool to be doing something is a bit of a strange one," he said.

"We do note there are serious disruptions happening to certain sectors of the economy and we understand the stresses they are facing."

But there were other methods of support that were probably more relevant at this stage, such as fiscal stimulus from Government, he said.

"We can provide some assurance that if the situation becomes more prolonged and more stressful for the economy, we will build that in and respond accordingly," he said.

"We have another review in six weeks' time and hopefully we'll have more clarity about whether our assumptions are valid or not."

Ha noted that the Bank's view of a short-term shock with a rebound was broadly in line with most other economic outlooks at this stage.

Authorities in Hubei, where coronavirus started in December, today announced more than 242 people had died from the disease - more than double yesterday's announcement, and takes the total death toll from the Chinese region to more than 1300.

The region also confirmed more than 14,000 new cases of coronavirus in Hubei yesterday.

However there are still no confirmed or suspected cases of coronavirus in New Zealand and only 500 cases confirmed globally, outside of China.