The Reserve Bank cut the official cash rate by 50 basis points to one percent on Wednesday, going further than economists had forecast, Marc Daalder reports.
In a surprising decision, RBNZ’s Monetary Policy Committee has cut the official cash rate by half a percent to one percent, to stimulate the economy against a global slowdown. Economists had forecast just a 0.25 percent cut.
The move comes as economists call for a greater focus on fiscal policy, with OCR cuts seeing diminishing returns and pass-through rates.
The economy is slowing down. Despite promising jobs numbers released by Stats NZ yesterday, year-on-year growth in the March and December quarters has remained stagnant.
Globally, the outlook is fraught as US President Donald Trump continues to wage his trade war with China, New Zealand’s largest trading partner. Brexit also casts doubts about New Zealand’s relationship with the EU and UK, our fourth and sixth largest trading partners, respectively.
Internationally, central banks have cut rates more cautiously. Yesterday, the Reserve Bank of Australia kept interest rates at one percent, after two successive 0.25 percent cuts in June and July. In the United States, the Federal Reserve also cut interest rates by a quarter-point on August 1.
But the Reserve Bank justified its half-point cut in its Monetary Policy Statement, arguing “that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives”.
While the OCR cut is meant to help bolster New Zealand against these global headwinds, economists worry about its efficacy. The last cut, in May, was a quarter of a percent, but floating mortgage rates only saw a 0.12 percent drop.
Ahead of the Reserve Bank’s announcement, Finance Minister Grant Robertson conceded that fiscal policy was needed to keep the economy chugging along. “Clearly, monetary and fiscal policy both play a role,” he said on Tuesday. “Historically, [OCR cuts] tend to have an effect but obviously it’s only part of the picture.”
In the policy statement, the Reserve Bank also raised doubts about the powers of monetary policy. Committee members discussed, “the Bank’s current assessment of analysis on the transmission from monetary policy to growth and inflation. This suggested that the overall strength of these relationships was little changed in the environment of low interest rates”.
“The Committee agreed to continue to monitor and assess the impacts of monetary policy, including the transmission through to retail interest rates,” the statement said.
Robertson also defended the Government’s record on fiscal stimulus. “I believe we are doing more on fiscal stimulus. We lifted our operating spending in this budget to $3.8 billion per annum. We increased the amount of capital spending that we’re doing – big lifts in education and healthcare. We’ve got a big transport infrastructure plan that’s rolling out. So my belief is we’re already doing that.”
However, RBNZ encouraged the Government to do more. “The members [of the committee] discussed that fiscal policy could be more supportive if future announcements incorporate more spending or if the impact on domestic demand is larger than assumed.”