Michael Reddell: former Reserve Bank economist on the Reserve Bank cutting the cash rate by 25 basis points

It's the start of a significant turnaround for the economy - as the Reserve Bank slashes the OCR for the first time since 2020.

It's dropped the cash rate 25-basis points to 5.25 percent.

Former Reserve Bank economist, Michael Reddell says Governor Orr's post-announcement claims about the economy don't stack up.

"It's not as if some big event has happened externally, it's just that they badly misread what was going on in the economy - and it's pretty inexcusable."

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Episode Transcript

Speaker 1 (00:00):
Good afternoons. We've got the start of good news for
the economy. The Reserve Bank has cut the official cash
rate by twenty five basis points and there's likely to
be at least another cunt coming this year. Kiwibank ASB
and A and Z immediately announced that they were cutting
their mortgage rates and response and the Finance Minister was
celebrating as well.

Speaker 2 (00:16):
After four years, we're the only way for interest rates
to go was app The Reserve Bank is now forecasting
an era of interest rate reductions.

Speaker 1 (00:26):
Former Reserve Bank economist Michael Riddella's with me now, have Michael,
were you surprised to see them actually do the right
thing and cut.

Speaker 3 (00:36):
You couldn't quite tell what an institution that flip flopped
as much as they have. But no, I thought they
would find me today. When you're in a hole, you
stop digging, and even they learned that lesson right and what.

Speaker 1 (00:45):
Is the motivator for them? Basically because we're in a
third recession?

Speaker 3 (00:49):
Yeah, I mean they don't quite use those words, but yes,
the economies but are proven weaker than they expected. And
to get back to their made monetary policy statement, they
were expecting to see the economy starting to pick up.
If anything, it's getting worse, and they highlight a bunch
of high frequency indicators, business surveys and those sorts of
things that are looking really quite bleak at the moment.

Speaker 1 (01:07):
Yeah, an interesting press conference today. Adrian Or wouldn't admit
that he'd made any mistakes. Of course he wouldn't.

Speaker 3 (01:13):
Has he done that, definitely has. I mean, it's a
really bad look for the bank to have gone out
pretty strongly in May on the idea that rates would
have to stay out for at least a year. They
might even have to rise somewhat from there to where
we are today. And it's not as if some big
event has happened externally. It's just that they badly misread

(01:33):
of what's going on in the economy. And that's pretty
inexcusable because they were raising ranks up to the middle
of last year. Manity policy works of a lag. It
takes a year or so when you get interest rates
to a high level. A year or so later, you
expect to see things looking pretty sick, and pretty sick
they are. The good news is that means inflash is
really coming down, and they're now much more confident that

(01:54):
We're going to get back to the middle of the
target range, but at quite a price.

Speaker 1 (01:58):
Michael, can you explain how they misread things so badly
that they've gone from a possible hike in May to
a cut in August.

Speaker 3 (02:06):
It's hard to do so without being a fly into
all of their deliberations. But I think they were sort
of freaked for a bit about by some of the
things I'm so called non tradables inflation, so particularly rates
and insurance costs, and neither of those things are things
that Manshro policity can do much about. And somehow they

(02:26):
just got rattled and they didn't believe the narrative, they
didn't believe in their models, and a few bits of
data three months ago just mis led them. And it's
a week leadership on the part of the governor and
the chief economist not to have said, look, guys, let's
just hold the course and see what they get to.

Speaker 1 (02:46):
So what are you picking another cut by year's end
and four and a half percent oh CR by mid
next year.

Speaker 3 (02:52):
I actually think they'll lend of having to go further
than that. If you look at the numbers in their
marshal policy statement, they expect to see growth rebounding quitely
but early next year, and it's just not clear how
that's going to happen. Fiscal policy is going to be
quite contractionary. The government's cutting and spending over the next
couple of years. Interst Rates on their own telling are
still above what we call neutral, so I wouldn't be

(03:14):
surprised if for the middle of next year we aren't
out of three or even two point five percent. Well,
I'm consistent with what's happened in previous using cycles over
twenty thirty years.

Speaker 1 (03:23):
Yeah, that's a massive change, isn't it. Michael. Thank you
very much for the expertise. Michael Radelle, former Reserve Bank economist.

Speaker 2 (03:29):
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