OCR cut: the economists' verdict

Reserve Bank governor Alan Bollard's surprise decision to cut the Official Cash Rate this morning has been largely greeted with approval by economists at New Zealand’s biggest financial institutions.

Goldman Sachs JBWere chief economist Shamubeel Eaqub, ASB chief economist Nick Tuffley, and BNZ chief economist Tony Alexander agreed that Dr Bollard made the right call. Westpac chief economist Brendon O’Donovan was more cautious, saying Dr Bollard had taken big ‘brave pills’ cutting rates before headline inflation has peaked.

“Only time will tell if he made the right call, it’s a mission impossible for them at the moment. They’ve got growth going through the floor, and inflation going through the roof – not an enviable position.

"Only time will tell if wage setting behaviour and pricing behaviour will be responding to the higher inflation as it ramps up, or whether the weak economy will constrain it. I think they have an inflation problem. I think we’re going into a mini cost-push inflation environment” Mr O’Donovan says.

The rate cut signals the end of a business cycle and the beginning of a series of rate cuts between now and the end of next year, which is predicted to take interest rates down to 6 per cent or below.

“I think Dr Bollard’s done the right thing” Shamubeel Eaqub says. 

"We’ve been arguing for some time that the economy is quickly sinking to recession and that they need to neutralise monetary policy. The Reserve Bank has come to the same view; we think there’ll be a series of rate cuts going down to 6 percent over the next 12 months or so.”

Tony Alexander thought that “Come the end of the year for the OCR, you’re looking at, we think, 7.25 percent, and probably going to end up somewhere below 6 percent, maybe 5.5 percent come October next year. There’s a lot of water to go under the bridge before that, but there we go.”

Dr Bollards move was seen as “mildly bold” by Nick Tuffley, arguing that “They are taking a slight gamble that the spike in inflation is not going to feed through and cause longer lasting problems.

"The concern that most central banks have is that the rise in commodity prices is feeding through into absolutely everything, and that’s where you get those 1970’s style wage-price spirals.

"They’re making that judgement that the economy’s going to be weak enough to offset the tendency to be able to push prices up to a noticeable degree.”

Mr Tuffley added that the retail sector and labour markets seem to have reacted particularly sensitively to the slowdown this year.

“Anecdotally the retail sector seems to have shifted very, very quickly. You certainly don’t seem to have a huge amount of pricing power at that final point in the chain.

"Also anecdotally, the labour market seems to be changing quite quickly, in terms of the tightness, the difficulty in finding people really does seem to have changed in the last few months.

"While three to six months ago people might have been a bit more inclined to go and wring a higher pay increase out of their boss, the boss isn’t in the position to come through on that at the moment. And of course your alternatives in rushing off to find someone else who will pay you a lot more has diminished a bit as well.”

The NZX has gained 1.2 percent this morning on the news, building on a 1.8 percent gain yesterday, while the New Zealand dollar has fallen more than half a cent to $0.74467, down from the $0.7500 level it traded at just prior to the reserve bank's decision.