“A general comment by dissenters to a cut of such magnitude is that such large reductions are generally reserved for extreme circumstances,” he said.
“It is not too difficult to argue that we are in such circumstances now.”
He said the Reserve Bank (RBNZ) no longer had to be concerned with preserving jobs, but had to avoid unnecessary instability in output, employment, and interest rates, and the exchange rate.
Inflation has fallen back into the RBNZ’s 1% to 3% target band and could undershoot the desired mid-point by 2% and go to the bottom of the target range.
“It is therefore not hard to argue that we should be at, or below, the RBNZ’s ‘neutral’ rate – neither boosting nor restricting growth – of 3.8% ... right now.
“The case for a 75-basis-point reduction in the Official Cash Rate does indeed seem legitimate.”
Dire economy – flashing red lights
“Our economic data is dire, and the RBNZ should probably be pushing the panic button. The economy is in recession and unemployment is on the rise,” Smith said.
He cited the weakness in the monthly measures of manufacturing and services sectors.
“Key parts of the Kiwi economy do appear to be stuck in a rut, which therefore increases the need for extraordinary measures.”
Smith doubled down on the domestic risks by warning of “flashing red lights” from overseas.
“The growth outlook for China, our largest customer, remains uncertain ... which poses downside risks to New Zealand’s real export growth, as well as export and import prices,” he said.
Smith’s call for a jumbo-sized OCR cut has not been completely ruled out by economists and finance sector observers, but it’s certainly a minority view.
BNZ’s head of research, Stephen Toplis, an early advocate of rate cuts at the start of the year, believed drastic measures were not needed and won’t be used.
“Given the RBNZ has already cut the cash rate 25 basis points more than it had assumed ... and given that it’s likely a further cut of 50 basis points will be delivered later this month, we see no reason to advocate anything more,” Toplis said.
ASB senior economist Mark Smith agreed. He said the hurdles to large rate cuts were high, and conditional on the economic numbers and balance of risks.
“We expect the RBNZ to revert to a more measured pace of OCR easing over 2025 with a 3.25% OCR endpoint being reached by late 2025.”
But Greg Smith said there was a further imperative – the gap between the final 2024 meeting and the first meeting next year in February.
“That’s nearly three months during which quite a lot can happen to our growth profile and not necessarily in a good way.”
Anecdotal evidence they were receiving from businesses, big and small, pointed to struggling firms, some on the brink of failure.
“A larger rate cut this side of Christmas might make all the difference,” Smith said.
He questioned whether “the much-needed real jumbo cut [will] be avoided altogether?”
“To save an admission that the New Zealand economy is lagging many others and that rates were pushed up too high too fast and kept there for too long?
“Time will tell.”
