OCR to hit lowest point this week

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A historic low is looming for the OCR this week but it could be the trough of the cycle, with most economists predicting the cut will be the last.

Friday, November 4th 2016, 1:21AM 1 Comment

by Miriam Bell

Expectations that the Reserve Bank will cut the OCR to a record low of 1.75% at the November Monetary Policy Statement (MPS) have been widely held for several months.

All of the economists who responded to mortgagerates.co.nz’s regular survey continue to anticipate a 25 basis point to the OCR next week.

This week delivered stronger than expected labour market data and slightly improved inflation expectations – and recent domestic economic news has been positive.

Despite this, inflation remains an issue for the Reserve Bank which means the latest economic data is unlikely to deflect the Reserve Bank from the interest rate track it has already set.

Westpac acting chief economist Michael Gordon said the Reserve Bank has strongly signalled a further easing and failing to deliver could lead to an unwanted and self-defeating market response.

“But we have to admit that the economic case for doing so is largely around keeping financial markets in check.”

BNZ head of research Stephen Toplis also thought the Reserve Bank would cut next week because they have said they would.

“And because, even within this bullish data set, there is no sign of impending CPI inflation pushing up to the Reserve Bank’s target.”

Until recently, many economists were expecting there was likely to be two further OCR cuts in the current cycle – one in November and another early in 2017.

However, this has now changed and most of the survey respondents now believe the next cut to the OCR will be the last one in this cycle.

Gordon said while inflation remains very low, the downside risks to the Reserve Bank’s view have clearly diminished.

“Beyond next week’s decision, the Reserve Bank is likely to retain a mild bias towards further easing – although it may soften its language.

“We expect the OCR to remain on hold through 2017, but suspect the Reserve Bank will pitch its published OCR track slightly below 1.75%, implying a small probability of another cut next year.”

ASB economist Daniel Snowden agreed that next week the Reserve Bank is likely to signal that any further easing is still where the risks lie.

“But a further cut is not the Reserve Bank’s base case. The strength of recent economic data has increasingly pushed market pricing to largely rule out the prospect of a sub-1.75% OCR.”

For Toplis, when all the economic data is put together, they could no longer justify the Reserve Bank cutting interest rates again in February.

This means that BNZ has now formally dropped the February cut they had pencilled into their forecast, although they think the Reserve Bank will leave open the possibility of a further cut.

“For most borrowers the end of the easing cycle is probably already history as rising global bond yields are putting upward pressure on lending rates now,” Toplis said.

“Additionally, any cash rate decline is highly unlikely to be fully passed on by banks, as has been the case for the last two cuts.”

In the light of recent economic data, both Kiwibank and ANZ have now officially changed their calls on how low the OCR is likely to go.

Kiwibank chief economist Zoe Wallis said that, beyond next week, they expect the Reserve Bank to leave the OCR on hold at 1.75% until toward the end of 2019.

“Above trend economic growth and rising capacity pressures are expected to eventually feed through into headline CPI, lifting annual inflation back toward the Bank’s 2% target.”

But it remains a story of solid economic growth versus weak inflation pressure and several risks that could bring the Reserve Bank back to the easing table in coming months remain, she said.

“These include the US election outcome, the market reaction if/when the US Federal Reserve lifts interest rates in December, the path of the NZ TWI, and whether or not international price pressures continue to rise.”

ANZ chief economist Cameron Bagrie expects a cut next week to 1.75% to be the trough of the cycle.

He said ANZ have removed the cut they had pencilled in for early 2017 from their forecasts. “The case for the Reserve Bank cutting the OCR further is weakening with each passing day.”

Of the survey respondents, only NZIER senior economist Christina Leung broke ranks to forecast a cut following the one expected next week.

She said ongoing low inflation expectations meant that another cut round the middle of next year to take the OCR to 1.50%, which would be the cycle’s trough, could be on the cards.

Many economists pointed to the NZ dollar as another key consideration for the Reserve Bank going forward.

TD Securities head of Asia-Pacific research Annette Beacher said that, in next week’s MPS, it would be the Reserve Bank’s comments on the currency that mattered.

Tags: banks interest rates OCR OCR forecasts RBNZ Reserve Bank

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