"Wake Up Go and Spend" was a message from Adrian Orr, New Zealand’s Reserve Bank Governor, to the New Zealand public, yesterday in the Monetary Policy Statement announcement. RBNZ cut the OCR by 0.50% (50 basis points) to 1.00%, as they try to insure against the downside risks facing the NZ economy.
The surprising bit
The cut was not unexpected, but the magnitude was. The market had priced in just over a 100% chance of a 25-basis point cut prior to the announcement. Adrian Orr indicated during the press conference Q&As that the intensification of the US China trade war helped to tip the balance in favour of a 50-basis point cut. He stated that the Reserve Bank had to consider the very low level of global interest rates and New Zealand cannot afford to be an outlier right now.
He later went on to say that they would much rather be faced with a scenario where inflation was heading into the higher end of their inflation target band and have to consider raising interest rates. A less aggressive cut could result in inflation heading into the lower end of their inflation target band and regret not cutting interest rates fast enough to stir inflation higher.
A horizon of lower interest rates
It is becoming increasing likely that interest rates here and around the world are going to stay low for a considerable period. With already low global inflation, we now have global economic activity slowing and an intensification of the US-China trade war, with little prospect of a short-term resolution.
What this means for investors
For NZ investors it’s going to be increasingly difficult to generate an income stream from their investments. Japanese, and more recently European, investors have been facing negative interest rates. So far New Zealand investors have been relatively lucky as they have been able to enjoy positive real interest rates right up until very recently. Unfortunately, those days now look to be behind us.
Greg Hayton is a Senior Fixed Interest trader and Portfolio Manager at Kiwi Invest – our investment team behind Kiwi Wealth’s funds.