Reserve Bank Governor Adrian Orr. Photo / File
COMMENT:
So the Reserve Bank, having decided it would need to cut the official cash rate by half a percentage point, has opted to front-foot the process and do it in one go.
Whatever merits this approach may have, they have to be weighed against some significant downsides.
The immediate effect was to send the kiwi dollar lower, to levels last seen four years ago.
But this is really just joining, perhaps inevitably, a race to the bottom in exchange rates that New Zealand cannot win.
It comes hard on the heels of the US Federal Reserve cutting its policy rate — and it has twice as much scope to keep doing that as the RBNZ now has — and the People's Bank of China allowing the renminbi to depreciate, dropping through the psychologically important level of seven yuan to the US dollar.
While it lasts, this relief on the exchange rate front will not only make it cheaper for foreigners to buy our exports but also to buy the farms and other businesses which produced those exports.
That is not unimportant, given our chronic unwillingness to save enough to fund investment spending, creating a deficit that has to be covered by either borrowing from, or selling assets to, the rest of the world. The former option has just become less attractive to foreign savers.
The lower exchange rate will also push up import prices and the tradeables component of the consumers price index — indeed that is part of the cut's purpose. Governor Adrian Orr, while in the private sector, once famously observed that trying to control inflation through the exchange rate was like trying to clean your teeth through your behind.
The context is a world economy that has become habituated to extraordinarily low interest rates, whose side effects are high levels of debt, bloated asset prices, compressed risk margins and inverted yield curves.
Into this fragile financial environment American voters have thrust the fateful figure of Donald Trump, who blunders around like a hippopotamus in an operating theatre.
Trump evidently has a primitive understanding of trade and it is not at all clear, as he throws around the weight of the United States, what his objective is, beyond looking tough to those Americans who can still bear to look at him at all.
His counterpart, Xi Jinping, meanwhile presides over an increasingly assertive China and does not look like someone who is going to be bullied into whatever the Trump Administration would regard as submission.
So it is hard to see this ending well, or ending soon.
Another channel through which the trade war is affecting us is through the impact on business confidence. Business uncertainty, Orr said, could be paralysing for investment activity.
The irony here is that the same global conditions which are forcing interest rates lower also make businesses wary of investing.
By cutting by an unexpected and rare 50 basis points, the Reserve Bank runs the risk that firms will conclude that things must be worse than they thought.
The bank, however, insists that monetary policy has not lost its potency and that by lowering the hurdle rate of return for business investment, it ensures more of it will occur.
Maybe at the margin. But its confidence about that is at odds with both anecdotal and survey evidence that it is not the cost of credit that has been holding firms back.
The Bank of New Zealand's head of research, Stephen Toplis, says he can't remember the last time anyone in corporate New Zealand complained to him about interest rates, and indeed in the NZIER's latest quarterly survey of business opinion only 4 per cent of firms cited finance as the factor most limiting their ability to increase turnover.
"Their problem is that their costs are rising but they can't pass those costs on," Toplis says, "and the political environment, both domestic and international, is not encouraging them to invest."
So it looks like the Reserve Bank is trying to set light to some pretty wet wood there.
As for the capacity of interest rate cuts from current levels to rev up consumer spending, there are also grounds for scepticism.
We can expect the elderly to spend less, as deposit interest rates already provide a pretty meagre and exiguous return to savers after tax and inflation.
And given how high household debt levels are, and given signs of a cooling housing market, many of the minority of households which have a mortgage might well use interest rate relief to deleverage a bit, rather than go out and spend it.
Indeed, that might be the right response. Arthur Grimes, a former chairman of the Reserve Bank, is critical of the current easing cycle: "One of the major problems caused by interest rate reductions since the [global financial crisis] has been to raise house prices, causing both increased poverty and a massive financial stability risk," Grimes says. "House prices need to fall and monetary policy should not prevent this from happening."
But it is something of a motif in the latest monetary policy statement to note, almost regretfully, the weakness of house price inflation of late and with it the wealth effect which had propped up consumer spending.
When asked about the risk that this week's cut would reignite house price inflation when that was something we had had too much of already, Orr was sanguine.
"We have been nervous about extreme levels of debt for small pockets of households. We are much less nervous about that now, having had our [loan to value ratio curbs] in place and having seen those debt levels evolve through time."
And as for those poor old savers, well, too bad.
"The official cash rate is a blunt tool," said Orr.
"The importance of an OCR is that it means that hurdle rates to invest change, currently lower, and investment is needed. That is why we are doing it.
"If you are unhappy with the returns you are getting on savings, it's about thinking about what are alternative uses for your savings, i.e. what are alternative investments. It is the alternative investments, i.e. putting your capital to work, that creates the additional demand we are talking about."
That would far outweigh the effect of savers having less interest income to spend.
But finding those alternative investments, when asset prices are as inflated as they are and floats are a rarity on New Zealand's puny stock exchange, would not be easy.
That is a wretched way of mitigating the risk that the prospect of negative real after-tax returns will starve the banks of retail funding.
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