Orr defends Reserve Bank’s big rate cut

Reserve Bank governor Adrian Orr came out swinging in response to an opinion piece from BusinessNZ chief executive Kirk Hope, who called on the bank to focus on a “conservative, principles-based, no-surprises approach to monetary policy”.

Hope had voiced concern about the central bank's latest 50-basis point rate cut, the scale of which took markets by surprise last week.

Kirk argued businesses are reassured when the central bank operates on known principles but said “last week's OCR cut was less predictable because it did not seem to relate to current inflation or unemployment data”.

Orr responded: “We cannot, and do not, set the OCR based on current or historical inflation and employment outcomes.

“We scan the horizon and chart for the journey.

“We look ahead — not behind.”

He said “global and domestic low inflation expectations sit as a key reason for lower global and domestic official interest rates”.

Hope also voiced concern about the central bank's proposal to lift the minimum amount of tier 1 common equity capital required by the four Australian-owned banks, which account for about 88 per cent of New Zealand’s banking system, from 8.5 per cent to 16 per cent and to 15 per cent for the smaller banks.

If implemented, the bank capital requirements would undoubtedly have a significant impact on business, he said.

Orr said the proposals were being “discussed in a very transparent and open manner, and we continue to engage with an open mind and have shared submissions on our website.”