The decision by New Zealand’s central bank to cut rates suggests a more pragmatic central bank operating without fear of political backlash.
Around 70 per cent of economists surveyed by Bloomberg were confident that the Reserve Bank would cut rates this month. Kapstream managing director and portfolio manager Raymond Lee wasn’t one of them. He felt that employment is strong enough for the cash rate to remain unchanged for the time being. However, he also believes the federal election had a role to paly in the RBA’s decision.
“Being so close to an election, we felt the RBA wouldn’t cut given what that might signal. They wouldn’t cut before an election unless it was an emergency event,” Mr Lee told Investor Daily.
“We think they will wait for the election to see what the outcome is and what the fiscal policies will be.”
A day after the RBA announced rates would be on hold, the Reserve Bank of New Zealand lowered its official cash rate by 25 basis points.
“The New Zealand economy is very similar to Australia,” Mr Lee said. “Inflation is low. The outlook for employment growth is a little bit more subdued in New Zealand. While the unemployment rate in New Zealand is lower than ours, it has been moving in the wrong direction.”
AMP Capital chief economist Shane Oliver was confident of a rate cut this month, but says the federal election played a “big role” in the central bank’s decision to hold.
“The federal election may have been a big factor. In the run-up to the decision Labor commented that a rate cut would signal how bad the economy is. The RBA may have taken the view that it is just to political at the moment to do anything,” Mr Oliver said. “I think the election played a big role in their decision.
“The RBNZ looks more proactive than the RBA does. New Zealand opted to cut rates on the back of a forecast that jobs growth would slow. It was basically in anticipation of some sort of deterioration in jobs growth and therefore a downward revision to their inflation forecast. The RBA seems more reluctant.”