Reserve Bank nudges Beehive with call for fiscal stimulus

Finance Minister Grant Robertson with Reserve Bank governor Adrian Orr. On Wednesday the Reserve Bank hinted that Government spending as well as low interest rates could boost the economy. Photo / File

COMMENT:

After raising alarm with a larger than expected interest rate cut in August, the Reserve Bank is now priming the Government to be ready when it runs out of ammunition.

The central bank left the official cash rate (OCR) at 1 per cent on Wednesday, having slashed the benchmark rate by 50 basis points at its last meeting.

This was widely expected, but even the lack of a fresh surprise was enough to initially send the New Zealand dollar and wholesale interest rates higher.

Although the central bank has certainly not ruled out further interest rate cuts (and is still expected to cut the OCR again in November), there were hints that the monetary policy committee may be questioning how much further it should go.

As well as warning of a risk that inflation does not pick up, the committee's statement warned that there could be a "long and variable" lag between a decision to move interest rates and any real impact on the economy.

The bank also acknowledged that low business confidence was partly down to Government policy, which was impacting investment decisions. There was no suggestion that (already low) interest rates were holding back business investment.

Instead, there was a clear nudge for the Beehive, with the committee saying repeatedly that there was scope for more fiscal stimulus, as well as risks that existing Government spending plans could be delayed, or have less of an impact than expected.

This may seem obvious, but it is unusual territory for the Reserve Bank.

August's cut, while it was designed to reassure markets that the bank was prepared to do what was necessary to maintain confidence, prompted some observers to question whether the economy was worse than expected.

The latest move, to issue a quiet but blunt call for the Government to be ready to step in, suggests the Reserve Bank is starting to question how useful further interest rate cuts will be.