Heya,

I mainly go for marginal rate in my answer, as that is the type of mechanism the OCR is meant to work through – as its supposed to change the price.

“Isn’t it curious then, assuming that rates are set correctly (at the
natural rate that gets the economy back to inflation less growth), that
there is still “the expectation that the future rate of growth is low”?
Don’t these expectations mean that the interest rates are wrong?”

The reason why the relatively forward looking rates are so low is interesting. We can always knock in a couple of other factors for kicks such as “a wedge in credit markets increasing funding costs” or “a change in time preference” but even then it may indicate that we believe “potential output” growth is pretty low.

Hi Matt, it would be more accurate to say that the central bank sets the average cost of borrowing, but I don’t know if that makes much difference to your answer.
I assume that you don’t mean the natural rate from the loanable funds theory because then you’d be meaning that the money market isn’t clearing. So you must mean the natural rate that ensures that the economy is operating at the steady state. Is that right?
Isn’t it curious then, assuming that rates are set correctly (at the natural rate that gets the economy back to inflation less growth), that there is still “the expectation that the future rate of growth is low”? Don’t these expectations mean that the interest rates are wrong?

One major consequence – it makes me a sad panda

Is downvoting your reply equivalent to ‘unlike’, or does it actually have consequences beyond that?

I am sure that writers from the RBNZ could write something far more literate and get it to a much wider audience 😉

I think the key thing to remember here is that the RBNZ isn’t really “setting the interest rate” – it is trying to adjust the marginal cost of lending to match the rate of interest rathe would set “supply and demand equal” in some sense.

The return to savers is low because the expectation of future growth is low, and so the return on investment is low – this isn’t the RBNZ’s fault in of itself.

The idea of whether the RBNZ should lower the OCR is a discussion around where the “natural rate” of interest has gone given what is going on in the underlying economy, so we need to ask what is happening with things such as capacity pressures and the economies natural ability to adjust to “create” work and output – as we can push the rate of interest below the natural rate insofar as we think there is capacity to move consumption and investment forward.

Sure we shouldn’t act like its a silver bullet, but the Banks actions will be determined by what is going on in the economy, and what is expected to happen, and what this means for the appropriate term structure of interest rates – rather than them setting this term structure directly.

No one ever thinks about savers! Retirees on already low incomes can’t afford to lose another 1% in gross interest. That increases their likelihood of voting for Winston First and therefore higher superannuation, so the long term costs of a short run attempt to boost demand are much higher than we might think.
There are so many unintended consequences that come from lower interest rates, besides making it marginally more likely investment will go ahead.