Huge OCR cut (75 points) possible next month

Debate is heating up over whether the Reserve Bank should sharply cut its official rate next month.

Financial markets are pricing in a 20% chance of a 75 basis point rate cut in November, and there is speculation this may be necessary as the next policy meeting is not due until February next year.

BNZ head of research Stephen Toplis said it was not out of the question, but a 50 basis point cut was much more likely.

According to him, the central bank has raised rates by 75 points or more only three times.

“During the global financial crisis, when Lehman collapsed and bank balance sheets looked terrible, we actually had a 100 basis point cut and two 150 basis point cuts in short order. the sector will collapse.

“Then we moved to a global pandemic. It resulted in a 75 basis point cut and, of course, in the early days and weeks of this pandemic, we were actually very worried about what was going to happen. We had forecasts for an increase in the unemployment rate. up to 20% and the world will collapse.

“They were last up 75 basis points when the CPI surprised them with a huge 0.8%. The recent CPI surprise was 0.1%, which is not really a surprise.”

Toplis said there was nothing catastrophic going on with the economy to justify such a deep cut and that there was a risk of inflation rising again.

The economist said interest rates must fall below 4% to stimulate the economy.

But he said they can’t fall too quickly because consumers are borrowing on short-term terms and will see the financial benefits of lower rates much sooner.

“Most people extend their mortgage interest rates beyond six months, so they’ll see a return on their investment quite quickly. We all talked a lot about the tax cut and what it would bring, it was something like $20 a week. for the average player.

“But these mortgage rate cuts are worth hundreds of dollars a week for some people. Now it will change (spending) behavior, but we just need to realize that we’re not actually just flooding the economy with money again and not seeing what impact it has.”

Toplis said there was no need to panic as it was clear the RBNZ wanted to cut interest rates to get the economy going again.

rnz.co.nz