So what, on reflection, are we to make of the Reserve Bank governor Adrian Orr last week slashing the official cash rate by half a percentage point to a record low of 1%?
After all, just the day before Orr made his historic move, Finance Minister Grant Robertson was delivering assurances to anyone who might be listening of the NZ economy’s “solid fundamentals” as he celebrated the unemployment rate falling to 3.9%.
Why then would investment guru Brian Gaynor label the OCR cut as a “bizarre decision”?
In his widely read column in the Saturday edition of the NZ Herald, Gaynor wrote:
“Populist politicians and central bank governors are obsessed with taking measures to avoid any form of economic slowdown. This approach, which has been strongly influenced by Trump’s pressure on the US Federal Reserve Board, is unorthodox, because expansions and slowdowns are an integral part of the business cycle. The weird 0.5% rate cut…means our Reserve Bank has more limited options if NZ is confronted by a serious recession”.
Westpac chief economist Dominick Stephens described the RBNZ decision as “stunning”.
“In the history of the OCR, the only times the OCR has been cut by 50bps or more have been after the 9/11 terrorist attack, during the GFC, and after the Christchurch earthquake.We are very surprised that the RBNZ decided to cut 50bps in today’s environment.“
The BNZ’s head of research, Stephen Toplis, says the biggest concern is that the Monetary Policy Committee continues to believe falling interest rates will drive growth higher in the same way that they have done in the past.
“In particular, they remain fixated with the idea that business investment will respond to the cuts that have now been made. We are far from convinced.
“It is our view that the cost of debt is not hindering investment activity in the slightest. And we consistently get feedback from business that lower interest rates will not foster heightened investment activity.
“The fact that input costs are rising (they will be rising more now) in an environment where they can’t increase output prices is resulting in downward pressure on profits. In addition, political and geopolitical concerns both here and offshore are creating significant uncertainty. Together these factors are what are crimping investment activity and a cut in interest rates is unlikely to solve the problem.”
John Roughan, in his Monday column in the NZ Herald, appears to agree with Toplis.
Noting that Orr is contemplating negative interest rates if recession really looms – a charge for saving, in other words – he points to the governor’s belief that the latest cut will boost business confidence.
“It is likely to do the reverse. Business has effectively been told the picture is worse than they can see. Or, if they don’t believe this they must doubt the competence of those now in charge of their financial lifeblood. Either way, it is not a recipe for confidence”.
Roughan reckons a small economy needs its monetary authority to be smarter than most. He believes the RBNZ’s pessimism could be contagious.
“The big interest rate cut last week could precipitate a slump with big consequences, which means National could be in a position to fix the bank before too long”.
So how was the RBNZ’s move viewed from abroad? Across the ditch, the Australian Financial Review headlined an editorial “RBNZ should go easy on the shock and Orr”.
It noted that Orr had a track record for surprising the Australian business community, with plans to almost double bank capital requirements for the Aussie-owned big four banks in NZ, and by blocking Australian wealth manager AMP’s move to sell its life insurance business.
The AFR says the RBNZ is right to prioritise the national interest but questions whether the NZ economy will be better off.
“It is hard to see the Aust or NZ economies, businesses, or citizens are better off with less transtasman integration, regulatory co-operation and more dirt cheap money. The smaller partner is likely to lose most”.
Here, at Point of Order, we’ll await further evidence before deciding whether the “shock and Orr” was a stroke of genius (as Orr himself sems to think) or a “colossal blunder”.