Lower Interest Rates on the horizon?

The horrific ordeal that Christchurch is presently undergoing is leading a number of economists to pick a drop in the OCR – the Official Cash Rate – set by Alan Bollard of the Reserve Bank of New Zealand.

Jane Turner of the ASB Bank is predicting half a percent (or “50 basis points” in bank-speak) cut as early as March 10 :

“The personal, economic and financial ramifications for the entire economy from the February 22nd earthquake are becoming increasingly severe as more information comes to hand.”

“At a time of national crisis, when the underlying economy is already proving frustratingly weak, a rate cut would potentially be very helpful to the recovery of the economy.”

Westpac chief economist Brendon O’Donovan said the quake was:

a “major economic shock” and while a rate cut might stoke inflation, it could also help restore confidence.

He added:

“Ultimately earthquakes are inflationary, [but] that’s a long way down the track, and who cares? A key plank in the economic growth story for this year has been kneecapped.”

From the point of view of the Reserve Bank, the reconstruction activity from the September 2010 quake was supposed to kick in later this year.  That won’t happen…poor Christchurch is effectively back to square one….actually, worse off than square one by an order of magnitude.

It is not like the economy was actually doing that well in any event…the contraction in the second half of 2010 surely had the Reserve bank considering a rate drop as recovery remains stubbornly elusive.

Deutsche Bank chief economist Darren Gibbs, said:

It now “looks clear” that a 0.5 per cent cut was in order.

Harking back to Christchurch, a structural engineer we know who is part of the teams working there now (and was there at the time of Tuesday’s quake itself – were a bit worried for a while that he was in the Cathedral Spire when it came down) has reported that he expects up to fifty percent of the CBD to come down.  FIFTY PERCENT!  One can only hope he is wrong, but engineers are not generally given to flights of fancy, at least not in our experience.

Surely Christchurch will be crippled by this for years, and no matter what your average North Islander likes to think the mainland and Christchurch in particular are a substantial portion of the New Zealand economy, not to mention the main South Island tourist gateway.

Seemingly alone, BNZ economist Doug Steel thinks we should leave the OCR as it is, least we send a signal to the wider world that the economy is in distress, which he thinks it isn’t necessarily.  From my point of view, it doesn’t seem to inordinately bother the world that the Australian and US cash rates are close to zero, so why dropping ours from 3% would send a damaging signal is unclear?  What….the world expects that a major earthquake would have no detrimental effect?  Far preferable, is it, to go down with the ship, all flags flying, than dare launch a possibly errant distress flare?

Too risky a strategy for me.  Lower the OCR and provide some further relief for mortgagees and businesses…..the sooner the better.


About Ivan McIntosh

I am a partner of Carter Atmore Law...residing in City Road just off the busy thoroughfare of Symonds Street, Auckland, New Zealand....where we are specialist business & property development lawyers, working for both local and international clients. Proud husband to Joanna, and dad to two sons. Passionate rugby supporter. Email: imcintosh@calaw.co.nz Ph: 64 9 921 5026
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