The times the OCR has been cut by 75 basis points or more

Monday, 28 October 2024

Finance Minister Nicola Willis talks to media after OCR cut

History shows the Official Cash Rate has only ever dropped or risen by over 75 basis points in times of crisis - but could November be an outlier?

Earlier in the month the OCR was cut by 50 basis points to 4.75% - which meant there had been a total of 75bp shaved of the OCR since May.

So on November 27 will they go big with their cut?

Infometrics chief executive Brad Olsen told Stuff at the beginning of the month there was potential for the Reserve Bank to do a larger cut next month.

“We do see the potential for the Reserve Bank to cut 75bp in November just because there is a three month break at that point, they may well want the assurance over the summer if they think they need to cut more aggressively.

“Then they’ve got three months to assess how that actually comes out in the economy until February.”

But BNZ senior economist Doug Steel did a deep dive into the previous times the OCR was cut by 75bp or more and and what caused it.

He found the OCR experienced a large when the banking sector was in turmoil in January 2009, dropping 150bp to 3.5%.

“New Zealand’s most aggressive rate cuts occurred around the time that Lehman Brothers collapsed and led the world into the 2008/09 global financial crisis. The environment today is massively different. There are no major liquidity issues in the banking sector and bank balance sheets look sound,” Steel said.

The next time it experienced a large cut was when it dropped 75bp when the Covid-19 pandemic began in March 2020, which was regarded as a “massive external shock”.

The Reserve Bank would announce the new OCR rate on November 27. Reserve Bank Governor Adrian Orr pictured. (File photo)

“For now, there is no major shock impacting New Zealand. That’s not to rule out another large external shock at some stage in the future but there’s certainly nothing like it in the offing now.”

Then when the Q3 2022 consumers price index was 0.8% higher than the Reserve Bank anticipated the OCR had a sharp 100bp increase.

“The recent 0.1% miss, this time on the downside, is not exactly in the same category.”

“All the above does not rule out a 75bp move at the November meeting but it is a strong reminder that, typically, the hurdle for the RBNZ doing so is high. We stick with our view of a 50bp cut in November, as we continue to monitor all incoming information,” Steel said.

BNZ chief economist Mike Jones said a larger 75bps cut was “a risk that can’t be ruled out” and labour market data out in early November may add fire to the debate.

“I think the most important thing is that the Reserve Bank is getting good bang for its buck in terms of the impact on market interest rates. Mortgage and term deposit rates continue to fall steadily and we suspect that will continue in the short-term.”