The Reserve Bank today announced that the OCR would be reduced by 0.75% to a new level of 0.25%.
International markets around the world have been severely affected by the outbreak of the Coronavirus (recently renamed to COVID-19). The US Fed took the unusual step of reducing their Cash Rate out of step with their usual announcement pattern. Australia has also reduced their cash rate.
The number one goal behind this OCR rate drop is to maintain business and economic confidence. Business owners will begin to feel the pressure of lower economic activity, and as their staff demand (or are required) to work remotely, money must be cheap and readily accessible. This is not a time for money to be sitting in cash accounts.
For employees, who may need to take time off or work less hours, it is important that expenses are reduced and lower mortgage rates will help with this.
We have already seen comments in the media that the Reserve Bank has gone too far. Where can they go from here if things get worse?
It's important to remember there are a number of factors at play here. It is an election year and Labour don't want a tanking economy any more than National want to inherit one.
There is also several other levers that the Reserve Bank and the government can pull in the future. They can support the currency, they can reduce LVR requirements and they can adjust tax rates to just name a few. But the OCR is highly visual and an easy way to get good press. Press that says "we are ahead of this crisis". Currency manipulation won't get nearly as many headlines as reducing the OCR did today.
Now is the time to prepare for an economic slowdown. We will be releasing a serious of blogs with the #PrepareDontPanic tag. Make sure your mortgage is setup correctly (talk to your Adviser to confirm this) and reduce your expenses. For more information, read our blog on 3 things to do to prepare for a recession.
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