What can be done to help our economy and families weather the impact of COVID-19?
Pressure is building on the Reserve bank to cut the OCR in response to the threat of COVID-19. Most enthusiastic is ANZ which began calling for a ‘double cut’ of 0.5 percent at the end of last month. Then again, they also thought a double cut was warranted back in September 2019.
Central banks overseas have begun to move with Australia cutting 0.25 percent, dropping to a new all-time low of 0.5 percent on Tuesday, and the US Federal Reserve making an emergency cut of half a percent.
These cuts are intended to buoy share markets which have been pretty volatile over the past several days, but it’s unlikely that a single action will resolve market anxieties, or that the rate cuts will have any real effect on those economies in the face of a potential pandemic. Proof of this came last Tuesday when markets rallied in expectation of a cut, only to fall sharply again on Wednesday once the emergency meeting and panic driven rate cut took place.
But with most mortgages on less than four percent already, and much of the population locked out of the housing market, recent experience shows that low rates tend only to drive house prices ever higher
The theory goes that lowering interest rates effectively gives people more money to spend, and that consumption will rise as a result. This only applies to people with debt, and in New Zealand that primarily means home owners. But with most mortgages on less than four percent already, and much of the population locked out of the housing market, recent experience shows that low rates tend only to drive house prices ever higher.
What then might have a material effect and help our economy through a looming crisis? Any policy response must cover the affected period, making a rate cut attractive as it can be ratcheted up again later once the issue is resolved. Building another motorway is out then, but speeding up the current infrastructure programme is an option. A package of short term targeted relief measures might prove effective, though it could be difficult to administer and deliver the right amount of help to the right place at the right time.
Overall the panic over COVID-19 demonstrates how dependant we are on a few sectors and a few overseas markets, China and Australia in particular. This is a wakeup call to finally move towards that diversified economy we have been talking about for decades.