OCR should remain at 2.5%: Dickens

The Reserve Bank's current 2.5% official cash rate (OCR) may be close to the neutral rate at which it neither encourages nor hinders the economy from growing, says economist Rodney Dickens.

The current OCR rate is the lowest it's ever been, well below its 8.25% peak between July 2007 and July 2008.

"The evidence from the economy suggests that the current level of the OCR at 2.5%, while low by historical standards, may be close to the neutral rate," Dickens, managing director of Strategic Risk Analysis, says in his "alternative Monetary Policy Statement."

While some evidence suggests the neutral rate may be somewhat higher, "it could end up below 2.5% if the international situation deteriorates further," he says.

"In line with the desire the avoid unnecessary volatility in output, interest rates and the exchange rate, the case for keeping the OCR at 2.5% is overwhelming."

The Reserve Bank's Policy Target Agreement with the government requires it to avoid "unnecessary instability in output, interest rates and the exchange rate."

Dickens says the housing market is the most interest rate-sensitive part of the economy with house sales responding quite quickly to changes in mortgage interest rates.

While the OCR has been stable since March, sales figures reported by the Real Estate Institute have been 20% below the historical average in the last few months.

"If anything, this suggests that the existing level of mortgage interest rates and the OCR are punitive, but this needs to be viewed in the context of the housing market still suffering as a consequence of the speculative bubble in prices between 2003 and 2007," he says.

Mortgage borrowers are working off some of the excessive debt they accumulated during the bubble and, once debt is down to more manageable levels, may respond more favourably to current mortgage rates, Dickens says.

Comments from our readers

On 29 September 2011 at 9:10 am Barry said:

The RBNZ and "commentariat" shilly-shallying around over interest rates is causing damage to investment intentions and confidence. A clear message needs to be put so that planning to invest in equipment that lasts 5 to 10 years can be soundly based and not simply guessed at

On 29 September 2011 at 11:09 am John said:

Wise words from Dickens, and the case for staying on floating rates intensifies by the day.

On 29 September 2011 at 1:44 pm Mike Ravlich said:

Rodney's comments & others he has made on this subject are making more & more sense, as we see the effects of our current approach, which often halts or slows any economic growth we may have, prematurely. Also we should stop listeneing to the "Bank" economists, who often have other agendas and keep an open mind on alternative approaches such as Rodney's.

OCR should remain at 2.5%: Dickens

The Reserve Bank's current 2.50% Official Cash Rate (OCR) may be close to the neutral rate at which it neither encourages nor hinders the economy from growing, says economist Rodney Dickens.

Thursday, September 29th 2011, 1:05AM 3 Comments

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