The OCR question: Do you feel lucky, Adrian?

know what you’re thinking,’’ says detective Harry Callahan, ‘‘Dirty Harry’’ in the eponymous film. ‘‘Did he fire six shots or only five?’’

It’s the 1970s and Callahan has been duelling with bank robbers on the streets of San Francisco. His adversary is propped up against a building, reaching for a gun. If Callahan had fired six shots, he’d be out of ammo. If he fired just five, he’ll have one left – enough, in his words, ‘‘to blow your head clean off’’.

Callahan grumbles out the immortal line, ‘‘You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do you, punk?’’

He was bluffing. Callahan had no ammunition, but he got what he wanted. The man surrendered.

Reserve Bank Governor Adrian Orr is in a similar position. The Official Cash Rate (OCR) – the benchmark for all interest rates – is at 1 per cent. Some forecasters are expecting Orr to cut it further in response to a coronavirus-induced global slowdown.

We know he doesn’t have much ammunition left, but just how much and when he’ll use it is the subject of much speculation. How lucky does he feel?

He could cut the OCR by 0.25 or, as ANZ is now forecasting, he could drop it by 0.5 (effectively two cuts at once). And there’s no guarantee that Orr will stop when he hits zero. Many central banks around the world have experimented with negative interest rates to encourage people to spend.

The OCR essentially sets the cost of lending. When you need to get people spending, the central bank slashes the OCR, reducing the cost of lending. People go out and buy things, and the economy gets better. This is essentially what happened in the aftermath of the Global Financial Crisis. Central banks, including ours, slashed their rates. Our OCR went from 8.25 per cent in June 2008 to 3 per cent in March 2009.

Those decisions probably saved the economy, but only to a point.

More than 10 years later, interest rates are still close to zero. Hiking them back to normal levels would likely produce panic and stifle growth – indeed, when governors have tried raising rates slightly, they’ve ended up having to cut them back after a grumpy response from the market.

It helps to look at the OCR as something more than just a lever to pull when the economy is slowing. It makes money cheaper, but that doesn’t always help if the problem isn’t the cost of lending.

Take coronavirus. The main problem at the moment is weakening demand for New Zealand exports in China. Cheaper money doesn’t solve this problem. Nor would it solve the problem if a widespread coronavirus outbreak occurred here.

If people can’t leave their homes because they’re in isolation, if deliveries can’t be made because drivers are also in isolation, the problem isn’t the price of money, it’s that there’s no way to spend it.

Interest rate cuts have negative effects too. Cutting rates makes borrowing cheaper, so those with money borrow more, creating an asset bubble. Low interest rates are one of the reasons housing is so expensive in New Zealand. Speculating is cheap.

With this in mind, the bank will be concerned that, in its desire to solve one problem, it doesn’t inadvertently create another. It also knows that the more it cuts now, the less room it has to manoeuvre when things get really tough.

They’re trapped like Macbeth, who whinged he was ‘‘in blood stepped in so far that, should I wade no more, returning were as tedious as go o’er’’. Translation: returning to normal is hard.

There are other consequences too. Higher interest rates keep the dollar high, hurting exporters. As other banks around the world cut their rates, there’s a chance we could cut ours to avoid a punishing rise in the value of the dollar.

But, as BNZ’s economics team points out, the dollar appears to be easing on its own. One dollar is worth US63c, down from 68c this time last year.

Remarks from Reserve Bank assistant governor Christian Hawkesby last week said it would be ‘‘weighing up the probabilities because the outlook is so unclear’’. He added: ‘‘Monetary policy is not the right tool to be using and there are a whole lot of different ways the broader NZ Government could provide assistance.’’

The bank would be wise to be cautious. There’s no point creating an asset-price bubble to solve a problem like coronavirus, which will eventually improve, especially when people, millennials in particular, are still grappling with the effects of low interest rates brought in to solve the last crisis.

The punks’ luck has run out, if they ever felt lucky to begin with.

The main problem at the moment is weakening demand for New Zealand exports in China. Cheaper money doesn’t solve this problem.