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Investment Manager Calls for Bold OCR Cut: Could a Jumbo 75 Basis-Point Slash be Justified?
In a bold move that has stirred debate across New Zealand’s financial sector, Greg Smith, an investment manager at Devon Funds, is doubling down on his call for a significant 75 basis-point cut to the Official Cash Rate (OCR). As the Reserve Bank of New Zealand (RBNZ) prepares for its final meeting of the year, Smith is once again advocating for a hefty rate reduction to combat what he sees as dire economic conditions.
Background: A Divergent View in Monetary Policy
Greg Smith has been vocal about the need for a more aggressive monetary easing policy. During the October meeting, he anticipated a substantial 75 basis-point cut, only to be met with a more conservative 50 basis-point reduction, which brought the OCR down to 4.75%. Undeterred, Smith is persisting in his call for a larger cut, despite the consensus among economists leaning toward a more moderate 50 basis-point adjustment.
Smith argues that current economic conditions warrant such drastic measures. According to him, the RBNZ is no longer focused solely on job preservation but rather needs to prevent instability in the economy, especially in light of fluctuating employment, interest rates, and exchange rates.
A Case for the Jumbo-Sized Cut
Smith believes that the RBNZ has room to maneuver, given that inflation has returned to the target range of 1-3%. He emphasizes that inflation could potentially undershoot the 2% midpoint, making it feasible for the OCR to be reduced to, or even below, the RBNZ’s ‘neutral’ rate of 3.8%.
“The economy is signaling distress, with multiple indicators pointing to a recession. Unemployment rates are creeping up, and sectors like manufacturing and services are underperforming,” Smith said. These dire economic signals, according to Smith, should push the RBNZ to take a more drastic approach to monetary policy by slashing the OCR by 75 basis points.
External Pressures and Global Economic Risks
Smith also highlighted external factors that could negatively impact New Zealand’s economic outlook. He cited the uncertain growth trajectory of China—New Zealand’s largest trading partner—as a significant risk. A downturn in China could reduce New Zealand’s export volumes and prices, which would further strain the local economy.
“Flashing red lights are everywhere,” he warned, pointing to global economic challenges that could further strain New Zealand’s economic resilience. For Smith, a proactive, sizable rate cut would serve as a buffer against potential external shocks, particularly over the long holiday period when the RBNZ won’t convene again until February.
Skepticism from the Financial Sector
Despite Smith’s compelling argument, his view remains a minority one within the financial community. The Bank of New Zealand’s (BNZ) head of research, Stephen Toplis, has been vocal in his opposition to such drastic measures. Toplis believes that the RBNZ’s previous cuts have already been more substantial than anticipated and that another 50 basis-point reduction should be sufficient to support the economy.
Echoing Toplis’s sentiments, ASB senior economist Mark Smith noted that the bar for such large-scale cuts is high. He pointed out that any drastic cuts would likely depend on upcoming economic data, which would need to present a clear case for further easing. According to ASB’s projections, the OCR will likely stabilize at around 3.25% by the end of 2025, suggesting a slower pace of rate cuts ahead.
Timing and Strategic Considerations
Greg Smith remains undeterred by the skepticism, arguing that timing is crucial. The RBNZ’s next scheduled meeting isn’t until February 2025, leaving a nearly three-month gap where economic conditions could deteriorate further.
“Our anecdotal data from businesses across New Zealand—both big and small—shows that many are on the brink of financial distress. A significant rate cut could be the lifeline they need to survive through the challenging months ahead,” Smith stated.
Conclusion: Is a Jumbo OCR Cut on the Horizon?
As the financial community awaits the RBNZ’s final meeting of the year, Greg Smith’s call for a 75 basis-point cut remains a hot topic of discussion. While most economists are advocating for a more measured approach, Smith’s argument for a proactive and substantial reduction presents a compelling case for aggressive monetary policy to safeguard the economy.
The next few weeks will be critical in determining whether the RBNZ will heed Smith’s advice or maintain a more cautious approach. Either way, the decision will have far-reaching implications for New Zealand’s economic landscape as the country grapples with rising unemployment, recessionary pressures, and external economic risks.
SOURCE: RNZ