Recent credit market uncertainty has seen the funding cost for retail banks rise significantly. It is possible that the impact of the 50 basis point cut in the official cash rate on September 11 could be more than wiped out.
As a result, if credit market uncertainty remains over the next month there will be substantial pressure on the Reserve Bank to cut further – in order to provide the “relief” to households that they have deemed necessary. Given that the market was torn between a 25 basis point cut and a 50 basis point cut in October already, recent uncertainty could well push the Bank to a massive 75 basis point cut!
Now, I’m definitely an inflation hawk. However, I have no issue with the Reserve Bank cutting interest rates in the face of rising financing costs – as they are effectively cutting in order to stand still. However, I would like it if the Bank could state that they are cutting to do this more transparently. For example, if they could create an index which represents total funding costs and forecast it out they could show that they could show that they are keeping financial conditions in restrictive territory.
Not delivering this message effectively put inflation expectations at risk and damages credibility – in this sense I strongly agree with Stephen Toplis from BNZ.