Lopping the OCR might be a stroke of genius – or an Orr-ful monetary policy blunder

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”.



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