Comment: Federated Farmers Manager General Policy Nick Clark takes a look at what the Official Cash Rate cut could mean for farmers.
Markets and economic commentators were stunned by the Reserve Bank's 50 basis point slashing of the Official Cash Rate, taking it down to just 1.0 per cent.
The only other times we have seen such big cuts was immediately after the 9/11 terror attacks and during the 2008/09 Global Financial Crisis.
Although employment is around its maximum sustainable level and while inflation remains well within 1-3 per cent target range, the Reserve Bank is worried about slowing GDP growth and rising economic headwinds – at home and abroad.
Read more from Federated Farmers here.
In the absence of additional monetary stimulus, it thinks employment and inflation would likely ease relative to its targets.
Banks rushed to cut their floating and fixed residential mortgage interest rates (good for borrowers but bad for savers) but it remains to be seen if these flow through to farm mortgages and overdrafts.
Meanwhile, the NZ Dollar tanked, losing a cent against the US Dollar in the immediate aftermath.
A lower dollar will help boost farmgate prices for our export commodities like dairy and meat but it could also make imported inputs, including fuel and fertiliser, more expensive.
Where to next? At least one further OCR cut is likely but with each cut there is less room for further cuts if the economy continues to slow or if there is an economic shock, say from the global economy.
Unconventional monetary policy, like quantitative easing, is being considered but its experience overseas has been mixed and it should be a last resort.
The Reserve Bank said it could do with some 'mates'.
The Government's finances are healthy with a big surplus for the recently finished 2018/19 year and net debt around 20 per cent of GDP – low by international standards.
That would imply room to move but thanks to big spending increases in the 2019 Budget the operating surplus for the current 2019/20 year is forecast to be much smaller and if the economy slows further it could disappear altogether.
The Global Financial Crisis and the Canterbury earthquake have shown that it is not essential to maintain a surplus during an economic downturn or in response to a shock.
But deficits should not be allowed to become embedded structural deficits that cannot be easily unwound when times improve or if the fiscal position deteriorates badly.
Most farmers tell us they want a continuation of prudent fiscal policy but the Government has fiscal policy mates it could deploy, such as:
• Borrowing more to fast track infrastructure projects. Net government debt is low and long-term interest rates are at historic lows, so more infrastructure spending, provided it is on projects that will improve capacity in the economy, would be a sensible use for increased borrowing. There are certainly plenty of projects it could advance.
• Tax cuts to boost spending and investment. Tax cuts would boost disposable income and consumer spending and, in the case of businesses, would boost investment. Tax cuts, by leaving the Government less to play with, should also keep it from going on a spree of unproductive wasteful spending. Although tax cuts are not favoured by the current Government they can be targeted to help lower and middle income people.
• One-off targeted spending boosts like lump sums to beneficiaries and low-to-middle income people or subsidies for businesses to hold on to employees. One-off targeted handouts might make sense if the idea is to shore up activity, but caution would be needed to ensure they don't become costly ongoing entitlements.
• 'Permanent' spending increases over and above those already budgeted to allow departments to pay their employees more or simply for them to do more. While health and education could always do with more money, permanent untargeted spending increases are likely to result in more wasteful spending and would be risky for the longer-term fiscal position, especially with an ageing population. They would also be much harder and more painful to unwind when required.
Of course the other 'mate' the Government could deploy is commit to address the 'elephant in the room', the dire confidence of businesses and farmers, rather than just brushing it off as political bias.
This includes easing off or at least moderating policies in the employment, environmental and climate change areas which are causing so much anxiety and a sapping of confidence.