Opinion: What the Official Cash Rate cut means

Federated Farmers General Policy Manager Nick Clark. Photo / Supplied

Comment: As the global economy slows and the risks increase, most central banks have moved from being hawks to doves, writes Federated Farmers General Policy Manager Nick Clark.

Our slowing economy has prompted the Reserve Bank to cut the Official Cash Rate to 1.5 per cent.

A cut was always on the cards after the markedly softer tone taken by Governor Adrian Orr at the last OCR review back in March.

The question wasn't so much whether the Reserve Bank would cut the OCR, but when it would be cut, with opinion finely balanced between acting at this review or waiting to a bit later in the year, say in August.

Although inflation is slightly below the mid-point of the 1-3 per cent inflation target and employment is broadly at the targeted maximum sustainable level, the newly-established Monetary Policy Committee decided a lower path for the OCR was appropriate.

This reflected economic projections and the balance of risks to inflation and employment.

Read more from Federated Farmers here.

Over the past couple of years the economy has slowly but steadily become sluggish and the Reserve Bank thinks it needs a kick-start to get it going again.

Banks responded by passing on at least some of the 25 basis point cut to their mortgage rates and the NZ Dollar dropped sharply immediately after the announcement.

Where to next?

The Reserve Bank's forecast for an OCR of 1.4 per cent by March 2020 is roughly equivalent to half a further cut.

This allows for the possibility of further OCR cuts, but does not commit the Reserve Bank.

It will look to see how the economy plays out over the coming weeks and months.

A lot will depend on how the economy responds to this cut and other economic developments both overseas and within New Zealand.

Overseas, although commodity prices have been strong in recent months, the US-China trade war is heating up, there is heightened tension in the Middle East, ongoing Brexit paralysis, and anaemic growth in Europe.

As the global economy slows and the risks increase, most central banks have, like ours, moved from being hawks or fence sitters to doves.

In New Zealand, we're waiting for the 'Wellbeing Budget', whatever the Reserve Bank decides with bank capital requirements, and how other government policies (for example, climate change, employment law, and tax) affect business and consumer confidence.

Monetary policy needs mates and if other government policies aren't helping to make the economy more productive and competitive then the effectiveness of the OCR cut will be diminished.

In which case all it might do is give a short-lived spurt to the housing market and see any interest savings to borrowers eaten up by higher prices.

The OCR will next be reviewed on 26 June.