Reserve Bank should have cut OCR - economist

The Reserve Bank's too optimistic about the economy's prospects, the chief economist of one of New Zealand's biggest banks has claimed.

Governor Adrian Orr on Wednesday decided to leave the official cash rate (OCR) at 1 percent, shocking banks who'd roundly predicted more cuts.

"We were convinced there was a good case for cutting interest rates given that growth is still slowing," ASB chief economist Nick Tuffley told The AM Show on Thursday.

Kiwibank for example told Newshub there was a 60-70 percent chance of a cut.

"We think they'll still end up cutting next year," said Tuffley. "They're still a little bit too optimistic on their growth outlook, and they still haven't taken into account the impact of the bank capital increases they'll be rolling out very soon as well."

Next month the Reserve Bank will reveal its new capital requirements for banks. It's expected the big four - ANZ, ASB, BNZ and Westpac - will have to hold onto an extra $20 billion between them, enough to withstand a one-in-200-year financial shock. 

Tuffley says this will be another handbrake on economic growth, which has been in a long, slow and gradual decline another economist recently described as "weird"

"We'll need to have more capital, it's more costly to raise the money and it is likely to restrict credit as well - so you've got that extra headwind that you've got to offset as well."

Adrian Orr.
Adrian Orr. Photo credit: Newshub Nation

Orr's last cut to the OCR was a hefty 50 basis points, but mortgage rates have been creeping back up to where they were beforehand, Tuffley says. But even if they're not as low as in Australia or Switzerland - where interest rates are negative - they're still at record lows for New Zealand.

"The bottom line is interest rates will remain low for a long period of time - they just perhaps could have remained a little bit lower if we'd seen an interest rate cut." 

Orr justified not cutting the OCR further on employment nearing its maximum sustainable level, with underlying inflation close to 2 percent.