Post-earthquake OCR cut unlikely

• Tweet

Don’t expect the Reserve Bank to cut the OCR again following the earthquakes earlier this week - despite the damage and disruption they have caused, economists say.

Friday, November 18th 2016, 11:24AM 1 Comment

by Miriam Bell

Following the devastating February 2011 Canterbury earthquake, the Reserve Bank cut the OCR by 50 basis points.

But, while the recent earthquakes have caused significant damage to a number of towns, cities and key infrastructure, a similar response from the Reserve Bank this time round is not on the cards.

ANZ chief economist Cameron Bagrie said that with the economy already operating at, or near capacity, this is a vastly different backdrop than during the Christchurch quakes.

This is important as when an economy is recording strong momentum it has a great deal more resilience to cope with negative shocks, he said.

“Finding the necessary resources will present challenges for the reconstruction effort; in a capacity-constrained economy the “boost” from a rebuild becomes negligible as you are merely shuffling resources around.

“There will be inflation consequences but the one-off impact can be looked through.”

Bagrie said markets are not reading too much into it at this stage and while it is a dampening influence on the solid New Zealand story, it is really a margin-of-excellence tweak.

“We do not buy into the view that this increases the odds of additional monetary policy easing as was seen after the Christchurch quakes.

“That would require a significant hit to confidence and activity, which we do not envisage at this stage.”

The recent earthquakes have had a devastating impact on a number of areas and on infrastructure, but this is not a Christchurch repeat, BNZ head of research Stephen Toplis agreed.

There might be a modest short term hit to GDP, which will be reversed, and further pressure will be placed on the already heavily capacity constrained construction sector, he said.

“This being the case, those that think this event will encourage the Reserve Bank to cut interest rates are likely to be barking up the wrong tree.

“At the margin, the medium term inflationary pressures that will be created will do exactly the opposite.”

ASB chief economist Nick Tuffley took a slightly different view.

He said that, at the margin, the earthquakes could increase the odds of another OCR cut by the Reserve Bank next year if the economic disruption is greater than currently anticipated.

“But, barring the Canterbury earthquakes, other recent natural disasters have had little overall discernible impact on New Zealand growth. We largely expect this to be the case again.”

Economic activity may well take a hit in the worst-affected areas, but the lingering effect from the quakes is likely to be higher inflation.

“With the broader economy in good shape and the earthquakes slightly inflationary if anything, we continue to expect the Reserve Bank to keep interest rates firmly on hold for the foreseeable future.”

Tags: ANZ ASB BNZ interest rates OCR OCR forecasts RBNZ Reserve Bank

Comments from our readers

Sign In to add your comment