How soon will OCR cut lift economic gloom?

The official cash rate has fallen, but how quickly can that lead to a rising economy? File photo. Photo: RNZ

A Reserve Bank decision to cut the official cash rate by 50 basis points might be good news for home loan borrowers but it is likely to be months before it has a real impact on the economy.

The OCR has been cut to 4.75 percent.

That is still above what the Reserve Bank would consider a "neutral" interest rate.

Infometrics principal economist Brad Olsen said the Reserve Bank "seemed to have realised" that the economy was weaker and did not require as much interest rate restraint, and that quicker cuts were needed to normalise interest rates.

"A clear, if only implied, admission that the Reserve Bank may have been too slow to act. It still could be too far behind, if inflation is already close to the mid-point of the bank's target and interest rate settings are still quite restrictive."

His colleague Gareth Kiernan said it would typically take nine months or so, even at the fastest rate, for interest rate cuts to have an impact on real economic activity.

"That would be consistent with my sense about the labour market further deteriorating from here.

"That will be an important factor in terms of household confidence and decisions around spending for a bit yet. Even though it's a bigger cut than would have been anticipated and an increasing number of people have been fixing [home loans] for six months - so it will flow through to household budgets quicker than might otherwise be the case - it will still take several months to have a proper impact."

But Alan McDonald - head of advocacy at the Employers and Manufacturers Association - said it was "more about the signal than the quantum".

"The signal is travelling in the right direction and backs up some of the green shoots rhetoric floating around at the moment. Anything that's likely to take the pressure off the cost of borrowing for businesses of all sizes is welcome."

He said it could boost sentiment and would mean that some businesses "on the edge" would be encouraged to try to stick it out a bit longer.

Retail NZ chief executive Carolyn Young was buoyant about the potential effect on her sector.

"Coming at the beginning of Q4, this will be welcome news for retailers as they prepare to enter the period that is traditionally the busiest time of year for retail sales. Strong pre-Christmas sales are critical to retailers meeting their annual sales targets."

She said Retail NZ was hopeful that the announcement would turn around consumer confidence. "Improved confidence will help retailers, who have been suffering a continued downturn in sales."

Dress Smart Auckland centre manager Lauri Solecki said after the first cut this year, there had been an "instant reaction".

"We saw a significant surge in foot traffic, of almost double-digit growth... it was really positive to see the impact that consumer confidence had for the centre and the retailers here."

Olsen and Kiernan said it was likely another large cut would happen in November - and the Reserve Bank could decide to move by 75 basis points. The rate is not reviewed again after that until February.

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