Call for Reserve Bank to go ‘harder and faster’

Big job losses across the country are prompting calls for the Reserve Bank to cut interest rates more aggressively next week to help stimulate the economy.
Last week, meat processor Alliance Group announced a proposal to close its Timaru plant, affecting about 600 staff. That follows last month’s move by Winstone Pulp to shut down two Ruapehu mills, with the loss of about 230 jobs, and Oji Fibre Solutions’ closure of its Penrose paper recycling mill, with the loss of 75 jobs.
“Businesses hold out for as long as they can before they start cutting headcount,” said Kiwibank chief economist Jarrod Kerr. 
“We’ve seen it sort of snowballing a bit out there, where businesses have held off and held off and held off and then you get to the point where they just have to make cuts, because they’ve been in the red for so long, so that is definitely playing out.
“There’s massive job cuts happening.”
The Reserve Bank embarked on an easing cycle at its last meeting in August, cutting its benchmark interest rate by a quarter point to 5.25 percent as the economy weakened and inflation slowed. It opted for a cautious start to the easing, in contrast to the US Federal Reserve which cut by 50 points at its last meeting.  
Kerr would like to see the Reserve Bank move harder and faster with interest rate reductions, cutting by 50 points next week and another 50 points in November.
“Turning this ship around with a tiny rudder takes a long time,” he said, noting most mortgages were fixed, so lower interest rates took time to flow through.
“Now is the time to get rates low quickly, so it feeds through faster.”
Wholesale markets are pricing in an 80 percent chance of a 50 basis point cut.
The latest data from StatsNZ showed the unemployment rate rose to a three-year high of 4.6 percent in the June quarter. It’s expected to reach 5.5 percent mid-next year.
Some firms say they are being swamped with hundreds of applicants for jobs, and a report released yesterday by employment website Seek showed more people were applying for fewer jobs, dampening salary growth.  
“The labour market has clearly softened. You’ve seen wages coming off quite quickly,” Kerr said.
“For those who are directly impacted by losing their jobs, it’s a horrible position to be in and it will take some time to find employment in a weak economy like this, so it makes matters worse.”
Craig Renney, an economist and director of policy at the NZ Council of Trade Unions, said the employment market was really tough.
“We’re seeing very significant job losses,” Renney said. “There’s just a coordinated downturn across the economy, and that’s leading to job losses.”
Renney said the country was at the start of the bad news for labour markets as unemployment lagged behind economic weakness and job losses from big cornerstone employers would have downstream effects for suppliers and others in their local markets.
Like Kerr, he wants to see the Reserve Bank cut by 50 basis points next week, but he doesn’t think it will due to concerns about reigniting inflation.
Inflation slowed to 3.3 percent in the second quarter, close to the Reserve Bank’s 1 to 3 percent target.
“It still needs to maintain credibility in the minds of markets about being determined to bring inflation down to the midpoint,” Renney said.
To be sure, there are some signs that businesses have perked up and see light at the end of the tunnel following the Reserve Bank’s recent rate cut.
The latest ANZ survey released yesterday showed business confidence had improved in September, lifting 10 points to 61.
ANZ chief economist Sharon Zollner said the survey highlighted the risk that the economy’s response to lower interest rates could be more vigorous than is generally expected. 
The last key pieces of economic data ahead of the Reserve Bank decision include the NZIER’s Quarterly Survey of Business Opinion today and Friday’s monthly employment indicators.
“The monthly jobs data are more in focus given job cuts seem to be stepping up of late in the current economic downturn,” said ASB chief economist Nick Tuffley.
Like Zollner, he is leaning towards a 25 basis point cut next week but will finalise his view after the last key pieces of data are out.
“The employment reads will be increasingly important, as we are seeing more headlines suggesting employment is getting a bit worse in the short term before getting better,” he said.
“Further labour-related sogginess would flag that wage-related cost pressures should continue to wane, but also highlight that consumers will collectively remain cautious for a bit about spending.”