The BNZ has raised the question of whether inflation concerns may yet drive the Reserve Bank to cut the official cash rate (OCR) to an unprecedented less than 2%.
The Labour Party yesterday challenged the big banks to pass on all the most recent cut, after most only partially cut their lending rates.
Following last week's surprise 25 basis point cut to 2.25% for the interest-driving OCR, BNZ rural economist Doug Steel believes the Reserve Bank ‘‘may be backing itself into a corner'' towards cutting the OCR below 2%.
‘‘The Reserve Bank's 25 basis point cut . . . last week may not have been a mystery to those inside the bank, but it was certainly a surprise to markets, analysts and commentators alike,'' he said.
Several of the main banks have since cut their interest rates on loans by a portion of last week's 25 basis point Reserve Bank cut, a 50-year low.
Finance Minister Bill English said there was an expectation the banks would pass on those cuts over time, the New Zealand Herald reported yesterday.
Opposition leader Andrew Little said Labour would consider forcing banks to pass on the OCR cuts to customers.
He said the Government must pressure Australian trading banks, which pocket almost $90 million in profit each week, to pass on the OCR cut and help not only struggling farmers but all New Zealanders, Mr Little said in a statement yesterday.
‘‘Offshore banks send billions of dollars overseas each year while the Prime Minister talks about a thousand dairy farmers being forced off their land because of bank debt,'' he said.
‘‘Those who have profited during dairy's good times must now come to the table to work through a long-term solution.
‘‘That should start with passing on interest rate cuts and doing everything possible to keep Kiwi farmers on their land,'' Mr Little said.
Mr Steel said since the cut, the Reserve Bank had released an analytical note on inflation expectations, which considered the bank's rationale of its view that falling inflation expectations were problematic, necessitating last week's cut and the likelihood of a further rate cut.
Mr Steel offered up a quote from Reserve Bank deputy governor John McDermott, who said: ‘‘If the recent material decline in a broad range of inflation expectations measures continues, the bank would need to reconsider the outlook for interest rates.''
Mr Steel said one can ‘‘only assume'' this meant the Reserve Bank would ponder cutting its cash rate further than the 2% low already assumed in its latest monetary policy statement.
‘‘If, and that's a big if, the Reserve Bank remains consistent with this statement, then a cash rate below 2% starts to look almost certain,'' he said.
With headline inflation likely to remain low, Mr Steel said it was almost certain inflation expectations would fall further, triggering the reconsideration the Reserve Bank has suggested.
