MNI INTERVIEW: RBNZ OCR Below 1% Possible On Trade Woes

A global recession driven by U.S. tariffs could lead the Reserve Bank of New Zealand to downgrade its estimate of the neutral level of interest and reduce its 3.5% Official Cash Rate to below 1%, but uncertainty is elevated, a former senior bank official told MNI.

The OCR was at 1% in just 2019 before the pandemic, said Michael Reddell, independent economic commentator and former special adviser, economics, at the RBNZ. “I can see anywhere over the next 12 months between maybe 0.5%, 1% and something still around 3%,” he continued, noting a higher OCR would likely require a strong positive commodity-price shock or significant fiscal intervention, which the current conservative government would likely resist. “The outer end of the range of central estimates would probably be in the 1.5-2.5% range.” 

Pointing to the RBNZ’s February comments that doubted the need to ease below neutral, Reddell noted the Reserve at the time was more concerned about closing the negative output gap. (See MNI INTERVIEW: RBNZ Deputy Sees OCR Dip To Neutral, No Further) However, even before the April 2 implementation of U.S. tariffs, the markets had priced in an OCR below 3%. 

“The massive uncertainty and the actual restrictions that are still on are clearly a downside risk, and more so in places like New Zealand and Australia than the U.S., because we're not going to get the headline inflation effects,” he argued. “Market pricing probably looks more or less sensible given the fact that nobody actually knows what the trade environment is going to be two days from here, let alone six months.” 

Markets have fully priced in a 25-basis-point cut at the next May 28 monetary policy committee meeting and a 2.7% OCR by the end of the year, lower than the 3.1% terminal rate forecast by the Reserve in February. 

Reddell said the RBNZ will likely stick to quarter-point moves unless significant market volatility persists or increases. "But having done 50bp cuts several times in this cycle already, I don't see why they would regard it as outside the realms of possibility," he continued. "They'd probably be a little bit more nervous, because they are getting closer to their view of neutral, but they have got this overlay of potentially really big, nasty shocks, and they have tried to be preemptive at times in the past."

GLOBAL ORDER

Reddell, also a current board member at the Bank of Papua New Guinea, said central banks will need to watch market developments closely, particularly among U.S. dollar assets, and could be tempted to use bond buying to stabilise their economies alongside rate cuts. 

"We saw that back in 2020 when the Treasury market seized up, but it probably wasn't really necessary," he added, "But, that's not to say that [central banks] won't feel the need or the opportunity to do something again," he argued. 

Reddell doubted the world would seriously de-dollarise in the short term without a clear successor. "The extent to which yields have moved is material, but it's not super dramatic. Markets continued to function through that episode," he said. "But the fact that we're asking these questions and the fact that we had all that flurry of activity last week suggests we're closer to something nasty than we ever have been, or than we would have believed was conceivable two or three years ago." 

The U.S. dollar represented a clear successor to the British pound after the Second World War due to the size of its capital markets and economy, Reddell commented. "We just don't have anything like that now," he added, noting China lacked the rule of law and an open market, while the euro had failed to gain international traction over the past 25 years. "It is a reserve currency to some extent, but it's still very little used in currency trading, and its capital markets aren't that deep," he argued.