Winners and losers of big rate cut
OCR drop shows Orr still believer in power of rate cuts
The Reserve Bank has made a bold bet, doubling down to slash the official cash rate 0.5 per cent to an all-time low of 1 per cent.
There is a strong logic to the move.
By moving more aggressively now the RBNZ has surprised the market and pushed ahead of expectations.
Markets had already priced in at least two rate cuts this year — so why wait?
The move has achieved a much stronger drop in the currency than it could have with incremental cuts — delivery an immediate boost for exporters.
It will also likely drive a more meaningful reduction in interest rates for borrowers.
Banks were quick to start passing on floating mortgage rate cuts yesterday.
Still, I can’t shake a nagging concern about the dwindling fire power of monetary policy as interest rates creep closer to zero.
Does the Reserve Bank risk firing all its ammo in a phony war?
And could such a dramatic move actually spook business and rattle confidence?
The last time rates were cut this dramatically was after the Christchurch earthquakes.
The double cut also harks back to the bad old days of the global financial crisis.
Yet New Zealand is not in recession, markets have not crashed. Unemployment is at the lowest point in 11 years.
What happens if things really get ugly — if the trade war escalates further or New Zealand gets hit by some other headwind, like drought?
In nine months between July 2008 and April 2009 the Reserve Bank cut rates by 5.75 per cent. That kind of powerful monetary policy response is no longer on the table.
Here, in the interests of full disclosure, I should say that I am a terrible poker player.
I suspect Reserve Bank Governor Adrian Orr might be quite good.
If he has any concern about the dwindling firepower of his rate cuts then he is certainly not showing it.
In fact, yesterday he restated explicitly his faith in monetary policy as an instrument to target inflation and unemployment.
It’s power is not diminished just because the numbers involved are lower, he argued.
Orr did concede that the weird world of negative interest rates was now a possibility in New Zealand.
But making a bolder cut now meant that negative rates (or other arcane stuff like quantitative easing policy) was less of a possibility than it might otherwise have been, he said. Orr talks a lot about “regret analysis”.
In other words, a year from now when he ponders the RBNZ’s decisions in hindsight what would be worse — regret for cutting too hard and pushing the economy beyond capacity, or regret for moving too slowly and letting growth stall.
Orr, and his committee, favour a proactive approach — attack as the best defence.
Does the Reserve Bank risk firing all its ammo in a phony war? And could such a dramatic move actually spook business and rattle confidence?