A 75 basis point cut on the cards?

Recent credit market uncertainty has seen the funding cost for retail banks rise significantly. It is possible that the impact of the 50 basis point cut in the official cash rate on September 11 could be more than wiped out.

As a result, if credit market uncertainty remains over the next month there will be substantial pressure on the Reserve Bank to cut further – in order to provide the “relief” to households that they have deemed necessary. Given that the market was torn between a 25 basis point cut and a 50 basis point cut in October already, recent uncertainty could well push the Bank to a massive 75 basis point cut!

Now, I’m definitely an inflation hawk. However, I have no issue with the Reserve Bank cutting interest rates in the face of rising financing costs – as they are effectively cutting in order to stand still. However, I would like it if the Bank could state that they are cutting to do this more transparently. For example, if they could create an index which represents total funding costs and forecast it out they could show that they could show that they are keeping financial conditions in restrictive territory.

Not delivering this message effectively put inflation expectations at risk and damages credibility – in this sense I strongly agree with Stephen Toplis from BNZ.

  • I’d love to know what sort of cut would be consistent with general neutrality.

    If RBNZ saw this last bit of mess coming when they made their 50 point cut, I’ll owe them an apology.

  • Of course, since they framed it as “frontloading the easing” rather than “attempting to maintain neutrality in the face of an oncoming storm”, I have doubts.

  • “If RBNZ saw this last bit of mess coming when they made their 50 point cut, I’ll owe them an apology.”

    If they had framed the issue appropriately maybe – however, even if they had perfect foresight, their framing of the problem was terrible (although their head economists did do a good job of explaining it to other economists 😉 ).

    Ultimately, the Bank better be willing to lift rates again if funding cost pressures ease – which is why I would prefer some measure of financial conditions that they could explicitly target in a situation like that (in order to provide transparency).

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  • Matt
    I really like the idea of an index on funding costs with the RB’s forecasts. We need some sort of independent, robust measure of that figure. Right now it’s all so anecdotal and deniable.
    cheers
    Bernard

  • “I really like the idea of an index on funding costs with the RB’s forecasts. We need some sort of independent, robust measure of that figure. Right now it’s all so anecdotal and deniable.”

    Indeed. Ultimately, I think they could make up some financial conditions index that includes the interest rates they are interested in specifically, and then show the index at each round. With the talented econometricians they have I’m sure it would be no big deal to whip one up.

    That’s the thing that makes us all a bit nervous though – they could make up a graph that would illustrate their point, but they aren’t. Could they have attempted it and seen that it didn’t illustrate the point they wanted to make? Hopefully not.

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  • Thank you for valuable information.