Analysis: What the OCR cut means for you

4:52 pm on 8 May 2019

Analysis - Reserve Bank monetary statements rarely excite the passions.

The Reserve Bank of New Zealand

The RBNZ has cut the official cash rate from 1.75 percent to 1.5 percent. Photo: RNZ / Alexander Robertson

Even for the informed and interested, the past two-and-a-half years have been exercises in "deja vu all over again" as the RBNZ held its official cash rate steady at 1.75 percent, repeating a mantra of the risks being balanced, with the next move likely to be a rise, probably in a year or two ... or three.

But that changed in March when the RBNZ governor Adrian Orr said the risks were now tilted to the downside and the next move was more likely to be a cut.

That made the latest monetary policy statement a live event worth following.

Mr Orr and the RBNZ's newly established monetary policy committee have delivered a rate cut, that may be followed by another later in the year.

But was a rate cut needed, and more importantly will it work?

Opinion has been divided, with backers of a rate cut saying a slowing economy, cooling housing market, stubbornly low inflation, lower immigration, and a gloomier international outlook justified lower rates to stimulate the economy.

The RBNZ has duly delivered, with a statement that points to it concentrating on its knitting - getting inflation back to the target of 2 percent, and making sure the economy creates enough jobs.

"Given this employment and inflation outlook, a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates," Mr Orr said.

The RBNZ's forecasts imply moderate economic growth, steady inflation, and a 50-50 chance of another cut to interest rates before the end of the year or perhaps early next year.

Rescuing the kitten in the tree

An equally strong view has been that a cut was unnecessary and likely to be largely ineffective.

New Zealand is doing better than many economies, with growth around 2.5 percent, consumers are still spending and businesses investing, although perhaps not as freely as before, unemployment is close to a 10-year low, and domestic inflation pressures have been bubbling quietly beneath the surface.

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Reserve Bank Govenor Adrian Orr Photo: NZ Super Fund

One commentator said before the decision that a rate cut would be like sending out the whole fire brigade to rescue one kitten up a tree.

The last rate cut in November 2016 did little to boost consumption, although at the margins it probably underpinned the hot housing market, and retail banks lined their own pockets with the proceeds because they did not pass on the full cut to borrowers.

But a rate cut takes time to percolate through the economy, anywhere up to 12 months or longer. One cut by itself is largely ineffective, a bit like throwing a pebble in the pond - the ripples soon disappear.

Another cut will depend on whether the numbers showing a further weakening in the economy, and whether the world outlook turns softer, especially if the US-China trade dispute turns into a fully fledged war.

The retail banks have been quick to pass on some of the latest cut with floating and fixed mortgages lowered by a little over a tenth of a percent, while deposit rates have also been reduced, which will hurt those relying on their savings with in the bank.

The New Zealand dollar initially fell three quarters of a cent against the US dollar, before reclaiming much of the lost ground and settling about a quarter of a cent lower.

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