An all-time low official cash rate of 1.5% as of May 8 means borrowing a New Zealand dollar from the Reserve Bank is a step closer to the zero lower bound – with at least one more rate cut expected in the near future.

Despite excitement among mortgage owners and business, this is not good news.

The current benchmark interest rate is a sign the economy is not as strong as it could be, and that nearly a decade without an economic downturn might soon end.

Further, at the 1.5% cash rate, the nation’s ability to fight the next recession with monetary stimulus is severely impaired. With not enough room for further rate cuts, New Zealand would be possibly heading into the bizarre world of negative interest rates.

Other monetary policy alternatives are not appealing options either. From asset-buying programmes with mixed results to the alchemist’s elixir of money printing (aka modern monetary theory), it would be naïve to rely on the Reserve Bank to protect us from doomsday.

New Zealand should instead focus on much-needed reforms outside monetary policy to boost productivity, such as fixing our artificial housing constraints and setting clear fiscal boundaries between central and local governments.

The country should take the economic environment as an opportunity to avoid the next crisis rather than using the next crisis as a painful invitation to reform.

Calm before the storm

New Zealand has had long and sustained economic growth since 2010. But, by historical standards, a recession might be overdue: our economy has experienced a major economic downturn at least once every decade for the past century.

To complicate things further, underlying economic data – from long-run trends on slow wage growth and paltry productivity gains, to current tensions in global trade and asset price inflation – indicate a recession-free path might be under threat.

Kiwis are sailing on temperate economic waters but risk being oblivious to the unstable trifecta of low interest rates, low inflation and low unemployment.

Brave, new (and weak) monetary policy world

No doubt ultra-low interest rates are a relief for mortgage holders and business owners. But the fact that inflation has been reluctant to rise shows the current weakening of monetary policy to revive business activity. (To be clear, most developed economies are experiencing similar patterns.)

Further, this ultra-low interest rate environment means the Reserve Bank is short-handed to deal with the next economic downturn.

At the onset of New Zealand’s last recession in 2008, for instance, inflation was at 5.1%amid sustained economic growth. The official cash rate then was 8.25%.

In the 12 months of economic retraction and deflation that followed, the Reserve Bank reduced its baseline interest rate by nearly six percentage points to 2.50%. Even so, it took another year for the economy to recover.

This time around, despite continued low record official cash rates, the economy has been lacklustre at best. If the worst comes to the worst, the Reserve Bank would not be able to repeat the usual strategy of further rate cuts.

Other meagre options include the Reserve Bank sailing into the negative interest rate territory. Or starting a Kiwi version of large-scale asset purchases, where the central bank acquires a significant amount of financial assets funded by issuing reserves.

But if other countries’ experiences are any guide, both measures are costly attempts, with difficult implementation, and have limited efficacy.

More worryingly, under the guise of a modern monetary theory (MMT), ideological forces see the tepid state of the global economy as an opportunity to advance government largesse. All (dangerously) funded by chimeric wishes of lunch-free money printing.

At its core, the problem with the MMT thinking is it is not modern – the idea that governments could (ab)use money printing to fund their programmes is as old as money itself; not monetary – the concept is more about fiscal policy than proper monetary policy per se; and not even a theory – there is no consensus or formal framework to discuss its assumptions, methodology and outcomes.

Fortunately, most of the MMT battle for now is being waged in the US. But New Zealand should pay close attention before the movement fully lands on our shores.

Better not wait for the next crisis

Winston Churchill is famously credited with saying “never let a good crisis go to waste.” As any changes involve costs, it usually takes a good crisis to prompt governments, and voters, to accept reality and act accordingly – New Zealand’s major reforms between 1984 and 1993 are a prime example.

The problem with this logic is that promoting good policy reforms on the back of a massive economic crisis is much costlier than in more benign times.

New Zealand should accept the shortcomings of the present monetary policy environment and focus on increasing its economic resilience elsewhere. That is, New Zealand should start improving its fiscal and regulatory framework before the good times run out.

And make no mistake: the clock is ticking.

The list of resilience-enhancing reforms outside the monetary policy realm is long and overdue. For starters, we should fix our absurd land development regulations so our cities can grow up and out. Also, reforming the Overseas Investment Act could welcome much-needed foreign capital to lift labour productivity. Another positive step would be to improve the fiscal co-ordination between central and local authorities, releasing the right public incentives to grow our economy.

Tick tock, tick tock … Better to change by choice than out of necessity.

Notable New Zealand crises

• 2008 global financial crisis (11.8% loss in GDP)
• 1998 recession
• 1987 sharemarket crash
• 1978 recession (12.8% loss in GDP)
• 1968 recession
• 1951/52 recession (37.2% loss in GDP)
• 1948 recession (15.6% loss of GDP)