The Reserve Bank cut the OCR 50 basis points today, primarily on the back of the Canterbury earthquake. Their justification was based on a negative national confidence hit, on top of an already weak national economy. This framework was consistent with the thinking of many economists – so even with all this uncertainty, it appears that policy was relatively pick-able this time.
I suspect that they waited to cut at the meeting instead of doing it prior to the earthquake so that they could indicate this was “one-off”, and prevent a sharper drop in the currency and expected rates. However, no-one said that so I’m just guessing 😉
Demand is a nebulous concept, and they cut today as there is uncertainty regarding how heavily “demand” around the economy will drop following the earthquake. Economists will not have a good idea what is going on here for some time – so the Bank should be ready to respond once it is clear that this demand shock has worked through. We will see what happens.