Adrian Orr has brought out the big guns to put a sorely needed bomb under the New Zealand economy and now the government needs to do its bit, a top economist says.

The Reserve Bank’s decision to slash interest rates is a good move that shouldn’t come as a surprise, Kiwibank chief economist Jarrod Kerr says.

Reserve Bank governor Adrian Orr’s move on Wednesday to cut the Official Cash Rate to a record low 1% caught economists off-guard. Virtually all had predicted a drop from 1.5% to 1.25%, but Orr brought out the big guns.

That puts a much-needed firestarter into the New Zealand economy, Kerr says.

“We can’t get caught up in the fact that we were surprised by a cut of 50 basis points relative to our 25. Seriously, who cares?

“We were all forecasting the Reserve Bank to cut to 1% but we thought it would take a couple of meetings (of the Monetary Policy Committee). Orr did it in one, so he fast-forwarded what we already expected.

“He’s eased financial conditions, he’s lowered both interest rates and the currency, he’ll be sitting there today going, ‘job done’.”

Mortgage rates fell immediately and the dollar dived following the announcement which is good news for homeowners and exporting businesses.

The decision brings New Zealand into line with Australia’s cash rate of 1% and follows interest rate cuts around the world.

“Everyone’s quite nervous on the markets right now, with the trade war, Brexit looming, Europe slowing down,” Kerr says. “We’re a small part of a global chain. Had the Reserve Bank not cut yesterday we would have seen a really bad reaction on the financial markets.”

On top of that New Zealand’s own economic performance is not that flash. “The data over the last six months has not impressed, it looks like we’re slowing. We’ll have a growth rate of around 2%, which is disappointing to say the least, we need that growth rate to be around 3%.”

Drops in business confidence illustrate the story, he says. “The fact that businesses have been pessimistic for 18 months now is starting to feed through to decisions.”

This week’s bolder than expected cut is Orr trying to create a circuit breaker. “He’s saying, ‘I want to take as many excuses off the table as I can’, and one excuse is interest rates and fear around debt. Another excuse may be our currency is not helping our exporters enough.”

The Reserve Bank governor dealt with both of those this week, Kerr says.

He disagrees that the central bank has now used up its firepower, and that New Zealand could be faced with negative interest rates. It has happened elsewhere in the world but the Kiwibank economist doesn’t believe it will come to that.

“Orr has got loads of ammunition. He could do a lot of other things before we go to negative interest rates.

“He could come out at the next meeting and say, ‘I’ve cut to 0.75% and I’m going to keep it there or below for 5 years’. A number of central banks have done that, it’s called forward guidance, and it re-prices interest rates out 5 years, basically.”

It’s an effective tool that flattens expectations and provides certainty. Another more controversial tool is quantitative easing, or increasing the money supply, which has been used in the US, the UK and Japan.

The Reserve Bank has done its part in helping to stimulate the economy and politicians are the other side of the equation. Orr’s comment that he’s nervous the government’s promised increase in spending isn’t happening fast enough is key, Kerr says.

The governor was pressed about this in the Q&A after the announcement. “He gave the answer we all know, but you need someone like him to say, and that is the government should be spending more.

“He came out and said very clearly that the bank has just lowered the hurdle… and they’ve just made things that much easier, from their end, to do these large scale, long term projects that are desperately needed, because we haven’t done them for 20 years.”

Part of the governor’s message was to “wake up, go and spend”, Kerr says. Taken out of context it sounds reckless.

“I think what he’s trying to say is, ‘go out there and spend on quality infrastructure, education, doing all the good stuff’.”

At a household level Kiwis need to realise that they are experiencing the lowest interest rates in several generations. “They’re lower than the 1950s, and that’s fascinating for us, because that was at the end of a war, trying to rebuild.”

Rates are likely to stay at these levels for at least another five years. It means servicing or taking on debt is as easy as it’s ever going to be, Kerr says.