Investment manager Greg Smith of Devon Funds is maintaining his call for a significant 75 basis-point cut to the Official Cash Rate (OCR) ahead of the Reserve Bank of New Zealand’s (RBNZ) final meeting of the year on November 27.
Despite the RBNZ’s recent decision to lower the OCR by only 50 basis points to 4.75% in October, Smith argues that the current economic climate necessitates more drastic measures.
Smith asserts that the RBNZ should prioritise stabilising the economy over job preservation, emphasising the need to mitigate potential instability in output, employment, interest rates, and the exchange rate.
Inflation has returned to the Reserve Bank of New Zealand’s target range of 1 to 3% and may fall short of the desired midpoint by 2% potentially reaching the lower end of this range.
“It is therefore not hard to argue that we should be at, or below, the RBNZ’s ‘neutral’ rate—neither boosting nor restricting growth—of 3.8%.. right now,” Smith said.
“The case for a 75-basis-point reduction in the official cash rate does indeed seem legitimate.”
“The economy is in recession, and unemployment is on the rise,” Smith added, citing weaknesses in key sectors such as manufacturing and services.
“Key parts of the Kiwi economy do appear to be stuck in a rut, which therefore increases the need for extraordinary measures.”
He also warned of “flashing red lights” from international markets: “The growth outlook for China, our largest customer, remains uncertain… which poses downside risks to New Zealand’s real export growth, as well as export and import prices,” he said.
Meanwhile, some experts believe that discussions about a 75-basis point cut are now off the table, with a 50-basis point rate cut by the RBNZ predicted to occur.
BNZ’s head of research, Stephen Toplis, who was an early proponent of rate cuts earlier this year, believes that drastic measures are unnecessary.
ASB senior economist Mark Smith also commented: “A frontloaded pace of policy easing remains appropriate for now, with another 50 bp OCR cut expected in November (to 4.25%).”