OCR NZ cut: Reserve Bank defends heavy cut

The New Zealand Reserve is defending its recent official cash rate (OCR) cut, saying it reduces the need for unconventional monetary policy to boost inflation.

The cut, announced earlier in August by Governor Adrian Orr, was by a bigger-than-expected 50 basis points (bp) to a record low of 1 percent, surprising markets.

Speaking to the Bank for International Settlements forum in Manila on Wednesday, the Reserve Banks' assistant governor explained the reason for the dramatic drop.

"We judged that it would be better to do too much too early, than do too little too late," said Christian Hawkesby, who is also the RBNZ's general manager of economics.

"A more decisive action now gave inflation the best chance to lift earlier, reducing the probability that unconventional tools would be needed in the response to any future adverse shock."

He explained the neutral interest rate was now estimated in a wide range centred around 3.25 percent, which underscored that the bank's current record low meant policy settings were very accommodative.

Though Hawkesby said that the bank would likely be able to avoid using unconventional policy tools, he cautioned that limited scope for conventional interest rate cuts meant that "no future options have been ruled out".

The heavy cut came as a surprise to some economists, although it has also been met with praise.

"It was a surprise... but if you know Adrian, you probably shouldn't be that shocked by what he did, because that's his style," Juno KiwiSaver founder Mike Taylor told The AM Show following the announcement.

Mike Taylor.
Mike Taylor. Photo credit: The AM Show

Taylor questioned whether such a drastic cut was necessary, with the economy still growing at 2.5 percent a year, but conceded Orr might be "seeing things that I'm not seeing". 

"About bloody time, because somebody's got to do something," added economist Shamubeel Eaqub, saying Orr's predecessors were often too slow to react to changing economic conditions.

"There was always a fear that inflation was just around the corner... in contrast, with Adrian he has gone hard and he has gone fast."

Eaqub said the Government needs to up its own spending to keep the economy ticking over.

Shamubeel Eaqub.
Shamubeel Eaqub. Photo credit: The AM Show

However, the Opposition has a less-than-positive view, saying the only other times in the past couple of decades that interest rates have been cut so dramatically were in the wake of the September 11 attacks, the global financial crisis and the Christchurch quakes.

"A 50-point cut in OCR demonstrates clearly just how weak our economy has become under this Labour Government and yet Grant Robertson continues to have his head in the sand about the impact Govt policies are having," said National MP Amy Adams.

National finance spokesperson Paul Goldsmith also placed the blame directly on the Government.

"We need to move beyond policies that add costs to the business and drive down business confidence."

However Prime Minister Jacinda Ardern welcomed the latest cuts, saying it would drive investment and bring us into line with Australia.

"We are in an environment where unemployment is low, we see wages are increasing, and this cut will ultimately mean New Zealanders should face lower interest rates."

Reuters / Newshub.