The OCR hits rock bottom

We have almost full employment. House prices are still crazy. We can’t get people to work in forestry, horticulture or agriculture. Petrol prices are the highest they have ever been yet the Reserve Bank, having long signalled that this was on the cards, cut the OCR today to 1.5%.

The reason? Inflation is still not within the range required, and the bank has limited tools in its arsenal to control this. Interest rates are still the best way… and so we are about to see lower deposit rates, lower mortgage rates and lower returns on cash based funds.

If there was ever a sign that the economy is in real trouble, this is probably it.

A weakening job market and tepid inflation has led the Reserve Bank to cut the official cash rate (OCR) to an all time low.

On Wednesday the new monetary policy committee announced the OCR, which influences other domestic interest rates on loans and savings, was being cut by 25 basis points to 1.5 per cent, the lowest ever.

In response, the New Zealand dollar dropped sharply. Within minutes both ANZ and Kiwibank announced plans to lower mortgage and deposit rates in response to the news.

So our exports are now worth less, and mortgages are going to cost less too. What will this do to the housing market, as mortgage rates close to 3% now loom? Will it just push up house prices even further? The demand for housing is as strong as ever.

In a press conference at the Reserve Bank on Wednesday afternoon, Orr revealed that the decision of the committee to cut interest rates was unanimous, meaning no vote was required.

The Reserve Bank statement pointed to slowing global and domestic economic growth.

“Domestic growth slowed from the second half of 2018,” the Reserve Bank said in a statement,” the bank said.
“Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending.

Something doesn’t quite make sense here. Immigration numbers are down, but not by much, and we have had record numbers over the last few years, so the problem points to one thing only. Kiwis are leaving the country… in droves.

“Employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly.”

Something about this doesn’t seem quite right. If employment is “near its maximum sustainable level”, is that not usually a sign of economic strength? The outlook may be subdued, but the effect of that is not here yet… but the OCR has been cut anyway?

I do not know the answer, but Steven Joyce agrees with me.

Because the economic indicators at present would not normally result in a rate cut, I think Mr $11 Billion deficit is probably right. The government has recently shown another surplus, inflation is low and, as I have said before, unemployment is at record lows. So something else is wrong here.

Strangely enough, because Winston has tempered most of the government’s policies (including the Zero Carbon Bill, announced yesterday), I have been less alarmed by some government policies than I expected. Clearly though, not everyone feels that way.

Economic sentiment has not been strong since his government came into power, and now it is heading towards rock bottom. We should not be surprised of course. Those on the left will always tell you that business hates Labour governments. By the way things are heading now, clearly there is good reason for that.

Also, there is talk of further rate cuts. Things are becoming serious.