RBNZ OCR cut – the right policy instrument?

Although the OCR cut, 3% to 2.5%, this morning was predicted one wonders if it is the correct policy measure in the light of the Christchurch earthquake. According to Stephen Toplis of the BNZ, history has indicated that Alan Bollard is more likely to resist market sentiment when there is a chance of an OCR increase than he is when the market is pushing for an OCR decrease – obviously he is of the expansionary persuasion.
However, is a reduction in the mortgage rate for the population of Auckland and Wellington going to make any difference to the economic conditions in Christchurch? There maybe a reason to cut rates if the economy is stalling but it is early days with regard to the true impact on the Christchurch economy. It is interesting to note that the most rapidly growing area of the Canterbury region is agriculture which hasn’t suffered to the same extent as the CBD. The other area of importance is manufacturing and surprisingly that is holding up well considering the conditions. But with Reserve Bank being responsible for keeping the CPI between 1-3% (Policy Target Agreement) there have been pressures globally and domestically that threaten this target band, they include:

1. Oil prices ↑
2. Food prices ↑
3. General commodity prices ↑
4. Insurance costs ↑
5. Rents ↑
6. Building costs ↑

Christchurch is as much a supply shock as it will be a demand shock which in both cases will be inflationary. Irrespective of what Alan Bollard does he has a very big battle on his hands maintaining the Policy Target Agreement in the years to come.

2 thoughts on “RBNZ OCR cut – the right policy instrument?

  1. Jean

    I thought he “might” shift by .25…but .50 has me stunned. I think this will be short lived. Interesting Thursday morning, to say the least.

    Reply
    1. Mark Post author

      He might also be thinking about suggestions from Moody’s – ie reducing rates to stimulate more growth. Are we held to ransom here? If we didn’t cut would they downgrade our credit rating?

      Reply

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