Home Education Would an OCR cut help vaccinate the economy?

Would an OCR cut help vaccinate the economy?

8 min read
0
0
10

This story was originally published on Newsroom.co.nz and is republished with permission.

Most economists expect the Reserve Bank to hold the Official Cash Rate on Wednesday, but Bernard Hickey argues there’s a case for a 50 basis point cut to vaccinate the economy against a much more serious hit from the Wuhan coronavirus.

COMMENT: The Reserve Bank’s Monetary Policy Committee is meeting early this week for the first time this year to decide on whether to cut the Official Cash Rate from its current 1.0 percent to stimulate the economy, or to offset an economic shock.

In this handout photo provided by the Philippines Department of Foreign Affairs, Filipinos arrive after being repatriated from Wuhan, China, on February 8, 2020 in Clark International Airport in Angeles, Philippines.

GETTY IMAGES

In this handout photo provided by the Philippines Department of Foreign Affairs, Filipinos arrive after being repatriated from Wuhan, China, on February 8, 2020 in Clark International Airport in Angeles, Philippines.

The effects of the Wuhan coronavirus on the global and local economy over the next 12 to 18 months will be the biggest and most difficult topic of conversation, largely because it has hit hard and fast and appears much bigger in the wing mirrors than it may actually be in real life.

But there’s little fresh data to base a judgment on, and the risk is that a swerve away from the fast over-taking coronavirus could do more damage than being rear ended. The committee just doesn’t know.

READ MORE:
* Reserve Bank surprise: OCR on hold
* All big five banks now forecasting rate cut after inflation expectations weaken
* Reserve Bank should hold fire on interest rates and let Government do the work

Economists believe the central bank’s initial instincts should be ‘do no harm’ and just hold the OCR.

Inflation is well under control and, if anything, the data (pre-coronavirus) was mildly positive. The housing market here is heating up nicely again, even in Auckland. Business and consumer confidence are at least not sliding any more, albeit without any aggressive rebound.

The Reserve Bank should cut the OCR by 50 basis points, writes Bernard Hickey.

Supplied

The Reserve Bank should cut the OCR by 50 basis points, writes Bernard Hickey.

The global economy stabilised in November and December as China and America put their tit-for-tat trade wars onto the backburner and the US Federal Reserve’s soothing noises kept global stock markets firing ever higher.

But when the facts change…

But even over the last couple of days it has become clear the disruption caused to global supply chains by China’s cordoning off of cities with 60 million people and bans on Chinese tourists and students could hurt both the global and local economies significantly, particularly if it drags on into March and beyond.

ANZ Chief Economist Sharon Zollner said today that the effects of the virus could reduce New Zealand GDP by around 0.5 percentage points in the March and June quarter. She still expected the Reserve Bank to hold, but to leave open the option of responding at a later date.

“A temporary shock lends itself to a sharp recovery, but there’s a risk the slowdown is more prolonged,” Zollner said.

“If that risk materialises, the RBNZ and Government are likely to respond, but for now, the RBNZ can afford to be patient and see how things evolve,” she said.

50 basis point cut?

Former Reserve Bank economist Michael Reddell, who helped prepare forecasts for such decision, recommended a 50 basis point cut.

“Twice before the Reserve Bank has cut the OCR in response to truly-exogenous external events,” Reddell wrote in a blog post, pointing to 50 basis point cut after the 9/11 attacks and the Christchurch earthquakes.

The 2003 SARS outbreak was also a factor in a rate cut then.

“Set against the backdrop of those three cuts, I reckon the case for an OCR cut now –  even it had to be pulled back in six months’ time –  is stronger than in any of those other cases,” Reddell wrote.

Given inflation is moribund and business expectations for inflation ten years ahead are now both below 2.0 percent for the first time, there would be little to lose.

My view? An insurance cut would make sense

The Reserve Bank should cut the OCR again by 50 basis points to 0.5 percent to stimulate inflation and drag unemployment significantly below 4.0 percent in a way that fires up wage inflation and expectations.

The Reserve Bank’s survey of business’ and economists’ expectations of inflation, interest rates, wages and GDP was released on Friday.

The March quarter survey found businesses’ expectations of wage inflation fell again, which again supports the need to turn them around with more aggressive monetary and fiscal policy action.

This story was originally published on Newsroom.co.nz and is republished with permission.

As China and the US have put their trade war on hold, the global economy has stabilised.

Susan Walsh/AP

As China and the US have put their trade war on hold, the global economy has stabilised.

Load More Related Articles
Load More By admin
Load More In Education

Leave a Reply

Your email address will not be published. Required fields are marked *

Check Also

Parking fees hike for central Christchurch branded ‘nonsensical’

Hiking the cost of central city parking in Christchurch would be “nonsensical”…