Forget interest rate cut, says BNZ
The Reserve Bank of New Zealand is being urged not to bother cutting interest rates, with Bank of New Zealand warning cheaper borrowing costs may not solve the problem of low inflation.
With the risk that cheaper mortgages may simply add fuel to the fire of rising Auckland house prices, without stimulating the rest of the economy, cutting interest rates could reduce the scope the bank has to boost spending if a shock was to hit later on.
On Friday official figures are expected to show that the consumer price index (CPI) – the recognised measure of household inflation – fell back to 0.3 per cent in the year to the end of September, the lowest since the late 1990s.
With the central bank effectively required by law to try to raise annual inflation to 2 per cent, governor Graeme Wheeler has said he expects to cut the benchmark official cash rate (OCR) to 2.5 per cent before the end of the year.
But BNZ head of research Stephen Toplis said such a move may be pointless. The world is in a deflationary mode, technology has made it easier for customers to get the lowest price available and interest rates are already low. In that environment, cutting interest rates may only boost spending in overheated parts of the economy, without raising inflation.
‘‘The whole purpose of cutting interest rates is . . . the economy goes better because businesses invest more because it’s cheaper to borrow money . . . and households feel more comfortable to take on more debt to buy [goods],’’ Toplis said. ‘‘That’s all very well but we are not hearing businesses saying that the cost of debt is stopping them from doing anything.’’
Toplis said cutting interest rates would only reduce the RBNZ’s scope to boost confidence later in the case of some external shock, such as a natural disaster or international downturn.
‘‘The danger is, if you keep dropping interest rates to solve a problem that’s not solvable by dropping interest rates, what happens when inflation stays at zero, growth is at zero and some nasty shock comes along?’’
In 2014, on signs the economy was overheating, Wheeler progressively raised the OCR for the first time since 2010 from 2.5 per cent to 3.5 per cent. This year has seen most of the increases undone, and in September Wheeler signalled a return to a 2.5 per cent OCR before Christmas.
ASB chief economist Nick Tuffley is picking the RBNZ will cut interest rates on October 29, and said there is a risk of the OCR being lowered further in 2016.
Meanwhile, Westpac chief economist Dominick Stephens has predicted that the benchmark rate will eventually be cut to an all-time low of 2 per cent in 2016, as the RBNZ struggles to create inflation.
Westpac is predicting annual inflation will fall to a 16-year low of 0.2 per cent, driven in part by Jetstar’s new routes cutting the average cost of domestic flights.
BNZ head of research