The Reserve Bank's shock OCR cut explained

Economists are praising the Reserve Bank's "proactive" move to slash interest rates, though the Opposition has a less-than-positive view.

Reserve Bank Governor Adrian Orr on Wednesday cut the official cash rate (OCR) to a record-low 1 percent, citing "heightened uncertainty and declining international trade" and low inflation.

"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 on Thursday.

"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."

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

Other banks around the world have been dropping their cash rates too - India and Thailand slashed theirs on Wednesday - in a bid to boost spending and protect local economies from the worst effects of declining international trade.

"It gives us a cushion - it doesn't turn things around," said Eaqub. "If there's a global downturn, we will still be affected - but we want to make sure there is as much cushion as possible."

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

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

The Opposition said 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."

The Reserve Bank cut interest rates by 1 percent in the wake of the September 11 attacks from 5.75 percent to 4.75, but by the following July, they were back up to where they began. 

The global financial crisis saw the OCR plummet from 8.25 percent to 2.5 percent over the course of a year, while the Christchurch quakes prompted a 0.5 percent cut, following then-Prime Minister John Key's public call for lower interest rates, despite the Reserve Bank's independence. 

When it was in power, National often pointed to low interest rates as proof it was delivering for Kiwis because it made servicing a mortgage more affordable. 

"Good economic management that keeps interest rates low for longer is absolutely critical for families and homeownership," then-Housing Minister Nick Smith said in 2016.

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."

Newshub.

 

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