Why the Reserve Bank should cut interest rates by a further 1% before Christmas

By Greg Smith, Head of Retail at Devon Funds

The statement from the RBNZ showed that officials recognise that economic activity is “subdued,” in part due to restrictive monetary policy. The NZ economy is now in a position of excess capacity which allows or encourages price and wage setting to adjust to a low inflation economy. Economic growth is weak.

The interesting question is that If economy is as described and inflation is expected to remain and monetary policy is restrictive – why wouldn’t the bank move faster to get the OCR down to the neutral rate?

The rate move might always have seemed to be a binary option, with the RBNZ always likely to “stay in its lane” with a 25bps or 50bps cut. This is despite the fact that there were plenty of facts, figures and circumstances to support a bigger reduction.