Liam Dann: Reserve Bank leaps into new era with a bold OCR cut - did they get it right?

Reserve Bank Governor Adrian Orr. Photo / Getty Images

COMMENT:

The Reserve Bank has kicked off a new era of committee-based monetary policy with a bold move, cutting the official cash rate to a record low.

The RBNZ yesterday lowered the rate by 0.25 per cent - to 1.5 per cent - despite economic conditions being far from bleak.

It was the first cut since November 2016.

The move signals that, under Governor Adrian Orr's watch, and a new policy regime that considers employment as well as inflation data, the bank is prepared to get on the front foot to tackle slowing growth early.

It does leave room for critics who would prefer the bank had kept more rate-cut firepower in reserve for a serious financial crisis or recession.

A slowdown from an annual GDP growth rate - from three per cent to around two per cent - might not have been a high enough bar to cut in previous economic cycles.

However, with inflation largely missing in action, and central banks like the US Federal Reserve pulling the brakes on rate-hike plans, the new monetary policy committee agreed unanimously that the cut was needed.

The decision was also largely well received by economists.

In its monetary policy statement the RBNZ cited slowing global growth and highlighted local concerns - including the slowing housing market, gloomy business sentiment and tighter profit margins.

It noted that while employment was near "its maximum sustainable level" but that the outlook for employment growth was subdued and "capacity pressure was expected to ease slightly in 2019".

Inflation - which has been on the low side of the RBNZ's 1-3 per cent target band - was expected to rise only slowly.

The market had put odds of a cut at about 50 per cent - although the move was expected in August if not today.

The New Zealand dollar fell sharply, dropping from just above US66c to US65.47c immediately after the announcement at 2pm.

But it recovered during the afternoon - to US65.89c at 5pm - as markets digested the tone of the statement which did not point specifically to further cuts being required.

Orr said the lower OCR provided "a more balanced outlook for interest rates."

Many economists still see a second cut as likely this year but Orr indicated the Bank was prepared to wait and see how the data unfolded.

"We don't think they will stop there," said KiwiBank chief economist Jarrod Kerr. "The RBNZ's OCR trajectory shows a move to 1.4 per cent. That's the banks way of saying there's roughly 40 per cent chance of another move to 1.25 per cent."

The RBNZ would monitor how much of the 25-basis-point cut is passed on to borrowers and savers, Kerr said.

RBNZ cited a slowing housing market as one reason for the OCR cut. Photo / File

"If not all 25bps are passed on, the chance of a rate cut increases."

Banks did move quickly to cut floating rates, although not by 25 basis points.

ANZ, the country's largest bank, also said it would cut between six and 14 basis points off its fixed-term rates.

Others are expected to follow, although ASB chief economist Nick Tuffley said much of the move had already been priced in, with rates coming down in the past two months since cuts were first signalled in March.

While lower interest rates will offer some relief to mortgage holders and heavily leveraged businesses, there were also warnings that they may also reignite the housing market.

The Auckland market in particular was a cause of considerable concern for when prices soared from 2011 through to 2017.

A series of regulatory moves by both the central bank and Government have seen it cool and drift backwards in the last two years.

"Mortgage rates have plunged over the past two months, and today's OCR cut will cause them to fall further," said Westpac chief economist Dominick Stephens.

"We think the consequence will be an upturn in the housing market, starting in the second half of 2019."

Orr downplayed the risk.

"I wouldn't say worried," he said. "We have anticipated with lower interest rates it does free up cash and if [borrowers] want to in the housing market that will be their choice."

The sharemarket also bounded back sharply after the rate cut news, shaking off a big trade-war-related slump, to end the day in positive territory.

Trade wars aside stock markets globally have been buoyed by central bank policy shifts which suggest rates will stay at historic lows for some time yet.

Today's decision was the first to be made by a committee including external - non Bank members.

As well as Governor Orr it included deputy Governor Geoff Bascand, two RBNZ economists and three external economists.

Did they get it right?

Yes.

If you accept that a cut was needed at all then it makes sense to go sooner, to stay ahead of the market and deliver an economic boost before the economy loses too much momentum.

Questions will remain about whether central banks should be pushing harder to get rates back to more traditional levels before we face our next financial crisis.

But, in the face of a global central bank policy U-turn in the past few months - the new-look RBNZ has opted for action.