Extreme measures for extreme circumstances – why the RBNZ should cut the OCR by 0.75% when it meets this week

By Greg Smith, Head of Retail at Devon Funds

The rate implied by markets is now ~4.2%. In other words, while a 0.50% cut is favoured, there is also a possibility of a 0.75% cut. Within a relatively short space of time, this scenario has gone from what was seen as an outlier “extreme” call to one that is entirely “plausible.”

A general comment by “huddling” dissenters to a cut of such magnitude is that such large reductions are generally reserved for “extreme” circumstances. It is not too difficult to argue that we are in such circumstances now.

But even before that, it is worth remembering that the Reserve Bank’s mandate was changed at the end of last year to a single operational objective of “…future annual inflation between 1 and 3 percent over the medium term, with a focus on keeping future inflation near the 2 percent mid-point”.  Maximum sustainable employment is no longer an operational objective in the RBNZ’s remit. However, as a secondary objective they “Seek to avoid unnecessary instability in output, employment and interest rates, and the exchange rate”.