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RBNZ says rate cut, govt largesse will jump-start economy

RBNZ confident steep rate cut, government largesse will jump-start economy

By Rebecca Howard

Aug. 7 (BusinessDesk) - New Zealand's central bank is confident its 50 basis point rate cut coupled with the government's spending programme will be enough to jump-start the economy, but economists are sceptical.

"We believe the Reserve Bank is more hopeful than realistic about the scope for a pick-up in the domestic economy, with our forecasts showing that the government is struggling to get money out the door and businesses are unwilling to invest, even with cheaper credit on offer," Infometrics said in a note.

The monetary policy committee said it opted to cut the official cash rate to 1 percent to ensure inflation increases to the mid-point of the target range, and employment remains around its maximum sustainable level.

"More sooner is a safer strategy than slower for longer," governor Adrian Orr said at a press conference. Economists had been expecting a 25 basis point cut.

However, Orr said the Reserve Bank can't act alone.

"Monetary policy always needs friends," he said. "At this point, it needs friends around all parts of the economy - consumers to be comfortable, businesses to invest, and of course government to be spending."

In the monetary policy statement, the central bank said a material pick-up in gross domestic product growth is necessary for inflation to increase to 2 percent and for employment to remain around its maximum sustainable level. The employment rate was 67.7 percent in the June quarter.

Combined with loose monetary policy, fiscal policy is a key plank and "government consumption growth is projected to increase sharply from the second half of 2019," the Reserve Bank said. It is also counting on the increased fiscal stimulus to partially offset weakening global conditions.

In this year's budget, the government added $6 billion to its borrowing programme over the next five years to cover a shortfall in its cash flow to meet $41.8 billion of planned capital spending. It plans to ramp up spending in health and education infrastructure, which it says have been underfunded for too long.

Given capacity constraints, however, "our nervousness is that expenditure can't happen quick enough," Orr said. "Finding the space to increase investment and spending is a challenge."

When questioned about whether the government's plans are achievable, Orr said "we can never be certain. We are following the intentions of the government. They have made it very obvious and put a lot of their reputational capital on getting the spending done."

He also underscored that the fiscal numbers the central bank is using "come from Treasury and Treasury have already put a healthy dose of scepticism across those figures related to how quickly can you actually deploy. We are comfortable that they have thought very hard about the ability to deploy and those are the figures that sit in our forecasts," he said.

Bank of New Zealand's head of research, Stephen Toplis said the RBNZ’s forecasts are heavily reliant on an investment response.

"The bank has raised its GDP growth forecast to 3.2 percent for the year ended March 2021 and is expecting 2.6 percent the year after. We think this is highly unlikely."

ANZ Bank chief economist Sharon Zollner said the RBNZ "continues to forecast a stronger lift in activity over the next year than we do, driven by investment, construction, and government spending."

Orr noted, however, if things don't pan out as planned the bank can take further action.

"Today's decision doesn't rule out any future action," he said.

Economists also don't think the central bank is finished with most forecasting another 25 basis point cut in November. Investors also appear sceptical, with the two-year swap rate closing at 0.985 percent, down from 1.16 percent yesterday.

(BusinessDesk)

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