Liam Dann: The Reserve Bank enters a new era with a bold reduction in optical character recognition.

COMMENT:

The Reserve Bank has launched a new era of committee-based monetary policy with a bold initiative, bringing the official exchange rate to record levels.

The RBNZ yesterday lowered the rate of 0.25% – to 1.5% – while economic conditions were far from gloomy.

It was the first cup since November 2016.

This decision shows that under the supervision of Governor Adrian Orr and a new regime that takes into account employment and inflation data, the bank is ready to take the lead in dealing with slowdown in growth.

This leaves room for critics who would prefer that the bank has kept more firepower at reduced rates in reserve in case of a serious financial crisis or recession.

A slowdown in the annual GDP growth rate – from 3% to around 2% – may not have been enough to bring down previous economic cycles.

However, with inflation largely absent and central banks such as the US Federal Reserve putting a brake on rate hike plans, the new Monetary Policy Committee unanimously agreed that the reduction was necessary.

The decision was also well received by economists.

In its monetary policy statement, the RBNZ cited the slowdown in global growth and highlighted local concerns, including the slowdown in the housing market, sluggish business climate and tight profit margins.

He noted that if employment was close to "its maximum sustainable level", but that job growth prospects were moderate and that "the pressure on capacity should be slightly mitigated by 2019 ".

Inflation – which is in the lower range of 1 to 3% of the RBNZ – is expected to increase only very slowly.

The market had forecast a drop of about 50% – although this decision is expected in August if not today.

The New Zealand dollar fell sharply, rising just above 66 US cents to 65.47 US cents immediately following the announcement at 2 pm.

But it recovered during the afternoon – at 65.89 USC at 17:00 – as the markets digested the tone of the statement, which did not specifically state that new reductions were needed.

Orr added that the reduction in character recognition offered "a more balanced perspective of interest rates".

Many economists still believe that a second reduction is likely this year, but Orr said the bank was ready to wait to see how the data would unfold.

"We do not think they're going to stop there," said Jarrod Kerr, chief economist at KiwiBank. "The optical character recognition trajectory of the RBNZ shows an increase of 1.4% .It is so that the banks say that there is about 40% chance that a new progression is going on." at 1.25%. "

The RBNZ will monitor the share of the 25 basis point reduction to borrowers and savers, Kerr said.

"If all 25 basis points are not transmitted, the chances of a rate cut will increase."

Banks acted quickly to reduce variable rates, but not 25 basis points.

ANZ, the country's largest bank, also announced a 6 to 14 basis point cut in its exchange rates.

Others should follow, even though SBA Chief Economist, Nick Tuffley, said that much of the move had already been incorporated, with rates falling over the course of two years. last months since the beginning of the reductions, in March.

Although lower interest rates will provide some relief to mortgage holders and highly leveraged businesses, some have warned that they could also revive the housing market.

The Auckland market, in particular, caused serious concern during the 2011 to 2017 price hike.

A series of regulatory measures taken by both the central bank and the government have slowed down and declined over the past two years.

"Mortgage rates have dropped over the past two months, and the current reduction in OCR will make them fall further," said Westpac chief economist Dominick Stephens.

"We believe that the consequence will be a recovery of the housing market from the second half of 2019."

Orr minimized the risk.

"I would not say worried," he says. "We anticipated that with lower interest rates, this would free up money and if [borrowers] want on the housing market that will be their choice ".

The stock market also fell sharply after the reduction in the interest rate, which helped to avoid a significant slowdown related to the trade war, to end the day in positive territory.

Trade wars other than stock markets around the world have been fueled by central bank policy changes, which suggest that rates will remain at historically low levels for some time.

Today 's decision was the first one made by a committee made up of external members who are not members of the Bank.

In addition to Governor Orr, he included Deputy Governor Geoff Bascand, two RBNZ economists and three external economists.

Did they have it?

Yes.

If you accept the need for a reduction, it makes sense to act sooner, stay ahead of the market and revive the economy before the economy loses momentum.

Questions will remain as to whether central banks should do more to lower rates to more traditional levels before the next financial crisis.

But faced with the policy of the world central bank that has rocked in recent months, the new RBNZ has opted for an action.