Reserve Bank OCR decision hangs between global volatility and inflation pressures

By Nick Stride

The New Zealand Institute of Economic Research’s “Shadow Monetary Policy” board is recommending a 25 basis point cut to the Official Cash Rate (OCR) on Wednesday, but opinions vary on the balance of risks.

Kiwibank’s chief economist, Jarrod Kerr, was the sole member of the panel of eight recommending a 50 basis point cut.

Kerr argued the current 3.5% was “restrictive” for an economy “crawling out of recession.”

By contrast, Westpac chief economist Kelly Eckhold argued the Reserve Bank (RBNZ) should hold its hand at 3.5% on Wednesday.

“The inflation outlook does not justify significantly easier policy unless the impacts of weaker global growth have a tangible local impact.”

Three other panel members also felt the RBNZ should delay further cutting the OCR until August.

Viv Hall, a professor of economics and finance at Victoria University, said the downside risks for global and domestic growth outweighed upside risks for inflation.

“Currently available data doesn’t enable calling the direction of future OCR movements with any degree of certainty.”

Arthur Grimes, a professor at Motu Research and former RBNZ Chairman, said the world economy was very volatile, and there was a risk the RBNZ could be forced to backtrack quickly, increasing uncertainty.

“In this situation, while a tiny easing may be warranted now, on balance, it makes sense for the RBNZ to delay any change decision until the next review.”

Among those advocating a cut, BNZ head of research Stephen Toplis said uncertainty about the “right” level for interest rates was “extremely elevated.”

“The spread of possible outcomes is wide. Yet, despite this, we still feel that downside risks to growth and medium-term inflation should dominate the RBNZ’s thinking.”

John Pask, an economist at BusinessNZ, said spare capacity allows for further easing.

“However, continued geopolitical uncertainty presents both potential upside and downside risks to inflation over the medium term, which the Reserve Bank will need to keep a close eye on.”