Will the Reserve Bank put a mega-cut on the table?
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Will RBNZ consider a 75bps mega-cut?
With markets and economists picking another 50-basis-point (bps) rate cut as a near certainty when the Reserve Bank meets again in November, talk has now turned to whether it will consider a 75bps mega-cut.
Singapore-based Abhijit Surya of Capital Economics says 75bps will now be on the table.
“We think that the bank’s concerns about the state of the economy are well founded, especially with new data showing that household incomes continue to be squeezed by the ongoing downturn,” he writes.
“Against this backdrop, there is a growing risk that the RBNZ will pull the trigger on a 75bps cut in November, as opposed to the 50bps cut that both we and markets are anticipating.”
Mega-cut isn’t a technical term. I just made it up because it sounds like a catchy headline. But looking back, that size cut is a really big deal. The RBNZ last cut by 75 basis points in March 2020 as the global pandemic hit.
It only cut by 50bps after the Christchurch earthquake (literally) rocked the economy in February 2011.
The height of the Global Financial Crisis (GFC) was the only time rates have come off faster than they are (projected to) now. Back in 2008, the RBNZ delivered rate cuts of 100 and 150bps in October and December as it sought to address the biggest collapse in economic confidence since the Great Depression.
The question for the RBNZ might be: Is the economy really so bad it requires such a radical response?
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Well, hopefully not. Unemployment is not rising as fast and businesses aren’t failing at the same rate. And nobody is worried about a major bank collapse.
But it is also true that different starting points warrant different courses of action.
When Covid hit, the Official Cash Rate (OCR) was already sitting at just 1%, which didn’t exactly leave much room for the RBNZ to swing its infamous “blunt axe”.
When the GFC began to get serious in mid-2008, the economy was running hot. The OCR was 8.25% in June 2008. By June 2009 it was just 2.5%. That’s some serious monetary policy hacking.
This time around, inflation created by the pandemic stimulus required a heavyweight monetary policy response. A case can be made that it worked, it has done its job and it should be unwound as quickly as possible.
Assuming of course that today’s inflation data confirms it is really under control.
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