A 10% plus drop in dairy prices overnight on Wednesday now has attention turning to the Reserve Bank and its regular revision of the Official Cash rate next Thursday.

Speculation is now mounting that the Bank either at this revision or at the next Monetary Policy Statement on September 10 will drop the rate by 50 rather than 25 points from its current level of 3.25%.

The impact of the dairy price drop was reinforced today with the release of annual inflation figure of a0.3% in the consumer price index for the 12 months ended June 2015.

The Reserve bank is required to keep inflation between one and three percent on average over the medium term, with a focus on keeping future average inflation near the two percent target midpoint.

Yesterday’s inflation figure suggests it has ample room to move on any rate cut without breaching its inflation target.

If it does make a big cut the impact of that politically will be massive because It will confirm that the New Zealand economy is slowing much more rapidly than either Treasury or the bank have been forecasting.

That will impact into economic confidence figures and very possibly into support for National.

On Wednesday night the critical wholemilk powder price fell at the Global Dairy Trade auction to $1848 a tonne –— the second lowest nominal price since the Global Dairy Trade auctions began in 2008.

Wholemilk powder prices have been falling now for the past 18 months.

As a consequence today one bank, the ANZ is suggesting Fonterra’s milk price could be as low as $3.75 against $8.40 last season.

Advertisment

As early as last May Reserve Bank Governor Graeme Wheeler warned that a significant decline in the milk pay-out could place some highly indebted farmers under financial strain, particularly with the market for farmland being more illiquid in times of stress.

In May this year he warned that financial stress in the dairy sector could rise markedly if low global milk prices persisted beyond the current season.

Mr Wheeler came under fire yesterday from former Reserve Bank economist, Michael Reddell, in his “Croaking Cassandra” blog who said the Reserve Bank had belatedly recognised the need to modestly change direction.

“The Governor cut the OCR by 25 basis points last month, and foreshadowed that at least one more cut was likely,” he said.

“But the problem is that they are still well behind the game.

“The data are weakening faster than they are cutting, and the OCR was already too high right through last year.

“Difficult as it might be to make a large move at an intra-quarter review next week, the substantive case for a 50 point move is certainly strong. If not next week, then at the latest it should happen at the September MPS.”

Meanwhile New Zealand First is forecasting further downward revisions in the farmgate milk price and has called on the Government in introduce a package of measures including concessional loan for farmers though given the likelihood of a lower OCR it’s hard to see what the point of that would be.

The Greens saw the dairy price drop plus the announcement of 500 staff redundancies as evidence that the dairy prices were now impacting into the cities and their new Primary Industry spokesperson, Eugenie Sage was calling for Government funding and tax breaks to make rural New Zealand less dependent on dairying.

Labour’s Finance spokesman, Grant Robertson was also critical of the heavy dependence on dairying and said the expanding $13 billion economic black hole from this price collapse would cause significant economic damage to regions that were heavily reliant on dairy and the wider economy unless the government acted swiftly.

“Labour believes a responsible government would have made far greater efforts to build and diversify industries, invest more in our regions and in research and development,” he said.

Labour Leader Andrew Little is to announce a new tax proposal tomorrow which POLITIK understands will be directed towards small business.

But what is clear now is that the political debate is going to focus on how the country can lessen its dependence on dairying as it copes with the rapid slow down and presumed rise in unemployment that the dairy price drops will induce.