Courtesy of the Reserve Bank cutting the official cash rate since August last year, most interest rates for borrowers and lenders in New Zealand have declined by close to 2%. Is it likely that after reducing their official cash rate from 5.5% to 3.25% the Reserve Bank will continue to make cuts? Is it likely for instance that the 2.5% level the cash rate fell to during the Global Financial Crisis will be reached, or the 1% amidst deflation worries in 2019?

Not at all. The key thing to note is that when the official cash rate was taken to those very low levels in the past it was in an environment of fear that inflation would consolidate below the low-point of the 1-3% target range. That is not likely going forward.

First, inflation is at 2.5% which is closer to the upper part of the range rather than the lower. Second, as any consumer or business operator can attest, costs continue to rise. Examples include butter, meat, rates, electricity, and many imported goods.

More importantly, whereas on average since 1992 a net 26% of businesses in the ANZ’s monthly survey have said they plan raising their selling prices within a year, the latest reading is 45%. That is quite high still.

This high reading will partly stem from the crunching of business margins underway at the moment, along with the extra crunch expected to come. A net 73% of businesses anticipate that their costs will rise further over the next 12 months.

Then there is the absence of a decline in the economy to consider. After shrinking 1.1% in both the June and September quarters last year our economy grew by 0.7% in the December quarter. A similar performance is commonly estimated to have been recorded for the March quarter for which we await official data.

It is also worth noting that the unemployment rate sits at a level which by historical standards is quite low at just 5.1%. The rate was 6.7% in 2012 and over 11% in the early-1990s.

Our economy is growing, not shrinking, underlying inflationary pressures appear unusually strong considering the recent recession, and the uncertain global trading environment and supply chain disruptions could easily add to our local inflation.

Then there is one final factor to consider. The Reserve Bank eased monetary policy too much and kept it accommodative for too long over 2020-22. That meant they had to impose extra high interest rates in order to get back under control the inflation they helped create. They will not want to repeat that embarrassing mistake, especially as their competence has just again been called into question with regard to their misdirection regarding reasons for the sudden departure of the previous Governor.

Lack of credibility naturally tends to enforce conservatism and that means that we cannot rule out the current 3.25% being the low-point for the official cash rate this cycle. It is probably a 50:50 call as to whether the rate gets cut again. But if it does, a reduction below 3% will require some new extra source of concern regarding the state of our economy. It will have to be quite dire to offset the boom in dairy, red meat, and horticultural income currently underway.

For investors it seems safe to say we are close to but perhaps not quite at the low-point for interest rates this cycle.

This article has been provided for general information only. Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called "Tony's View". You can sign up at www.tonyalexander.nz