ASB says it is reducing five rates by up to 16 basis points. Photo: RNZ
ASB has cut its interest rates - but economists are split on whether escalating conflict in the Middle East means it's likely to be the last one for a while.
ASB said on Monday it was reducing five rates by up to 16 basis points.
The one-year rate drops to 4.89 percent and three-year to 5.09 percent.
Iran's parliament has voted to close access to the Strait of Hormuz in retaliation for US attacks on it, which could dramatically reduce the global supply of oil and push up prices. The decision is not yet final.
Simplicity chief economist Shamubeel Eaqub. Photo: RNZ
But Simplicity chief economist Shamubeel Eaqub said, in an environment where global risks were escalating, the Reserve Bank should not be concerned about inflation as a result of rising oil prices, and should cut rates.
"Rising oil prices and uncertainty in a weak economic backdrop are negative for growth.
"Higher oil and import costs reduce spending. Although it will be a lot less than the Iraq war, because our - and the global - economy is a lot less oil dependent, around 35 percent lower.
"Fear scuppers risk taking - that means fewer new businesses, less investment and less hiring. But these real economic effects take months to unfold. The Reserve Bank has room to cut interest rates. Government really needs to boost infrastructure investment."
But Infometrics chief executive Brad Olsen took the opposite view.
Infometrics chief executive Brad Olsen. Photo: RNZ / Samuel Rillstone
Olsen said ASB's latest cuts were meeting other rates available in the market, but there were big questions about whether anyone would want to cut any further.
He said swap rates, which drive bank funding costs, had shifted higher in recent months. While the increase was not large, it would "put a bit more of a squeeze" on anyone trying to secure cheaper funding.
Inflation expectations had lifted and the gross domestic product data was stronger than expected, too.
"You're seeing some of those stronger inflationary pressures that, even absent the current conflict in the Middle East, does raise the concern that effectively there's a bit more inflationary pressure in the system and there's not as much downside for further interest rate cuts."
He said market pricing was not expecting the official cash rate to drop below 3 percent.
"And there's a question over the timing of that."
Olsen said normally the Reserve Bank would look through oil price changes because they were often a short-lived spike.
"The difficulty the Reserve Bank might have trying to ignore anything short term at the moment is that if you've already got a lot of other little pressures building in the system, you've got a bit more food price inflation, you've got a bit more energy, fuel inflation, you've got a bit more uncomfortableness across the board there.
"Add in a short-term spike in oil prices and it starts to come through to transport costs and operating costs. If that starts to shift or reinforce that slightly worrying trend of everyone expecting a bit more inflation, that's where the Reserve Bank could get into trouble."
He said the Covid experience was a warning against acting on the assumption that bad things would happen to the economy while ignoring the price pressure that was actually happening.
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