Adrian Orr is impotent, not so Grant Robertson

The Reserve Bank’s target interest rate, the Official Cash Rate (OCR) has been slashed to a record low of 1.00%. Against a backdrop of a burgeoning international trade war, Reserve Bank Governor Adrian Orr is worried about being left behind in an international race-to-the-bottom to devalue currencies and support exporters.

The problem now is that the Governor has become impotent if he wants to further support a slowing economy by conventional means.

Immediately after slashing the OCR by 0.50%, the main banks reduced their two-year mortgage rates by just 0.04%. A mere $40 per annum saving on each $100,000 of mortgage! Hardly enough to party at the shops with.

The reality is that the banks source a lot of their money on international markets, where the OCR is irrelevant. And even for domestically-sourced funds, the banks are somewhat constrained.  Banks can’t afford to cut term deposit rates much more or their steady supply of relatively cheaper domestically-sourced bank funding may dry up.

This situation is problematic for the Reserve Bank.

The traditional theory that cutting the OCR will prompt more spending has reached its limits.

Adrian Orr has used up virtually all his ammunition. Trying to stimulate demand by cutting the OCR further from a 1.00% starting point is like taking a scalpel to a sword fight.

But just because Adrian Orr is impotent, doesn’t mean that the government is.

Take the Finance Minister Grant Robertson for example. If he really wants to pump up the economy, then he has options.

Minister Robertson could either cut taxes, or boost spending on big projects.

Spending on big projects would take a long time to take effect. Precious time that we would not have in a real crisis.

That leaves tax cuts as being the best short-term option.

And even better, would be to target these tax cuts at lower income households via a cash handout.

The idea is that these people will spend an unexpected cash windfall, which in turn will boost the bottom line of businesses around them. Giving money to the rich is less effective as they are more likely to not need the money and simply salt it away.

Minister Robertson could ask the IRD to put their fancy new computer system to work and deposit say $1,000 into the accounts of a target group.

This type of approach worked a treat for Australia in 2009, where Prime Minister Kevin Rudd gave $950 to most people. Unlike New Zealand, Australia warded off a recession at that time.

At least New Zealand is in a good starting point for considering such options. Our government’s debt is low by international standards, so it shouldn’t be hard to borrow a little more to stimulate demand should the shit really hit the fan for the economy.