Little doubt OCR cut coming

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Rare consensus reigns on the OCR forecast front with economists across the board expecting the Reserve Bank to cut the OCR next week.

Friday, August 5th 2016, 11:29AM 1 Comment

by Miriam Bell

Without exception, the economists who responded to the regular mortgagerates.co.nz preview survey all thought the Reserve Bank will cut the OCR by 25 basis points to leave it at a record low of 2.0%.

This consensus may be unusual, but it is not unexpected following the Reserve Bank’s economic update two weeks ago.

In the update, the Reserve Bank itself signalled that more OCR cuts were likely due to its concerns about ongoing low inflation expectations, the high New Zealand dollar and global uncertainties.

Now, many of the mortgagerates.co.nz survey respondents are expecting a cut next week not just next week, but later in the year.

ASB senior economist Jane Turner said there is 95% probability the Reserve Bank will cut next week, due to the high NZ dollar, and then 70% probability of another cut in November.

A 25 basis point cut in November would leave the OCR at 1.75% which is likely to be the trough of the cycle, but she said there was a small chance of another cut next year.

If this was to occur, it would be due to an even weaker inflation outlook, a fall in inflation expectations, and a weaker offshore growth outlook.

Overall, inflation risks remain skewed to the downside, Turner said.

“Given the possibility of further declines in inflation expectations, additional monetary stimulus is required to offset the impact of the elevated NZ dollar on the inflation outlook.”

Along with a cut next week, ASB expects the Reserve Bank’s policy assessment will, at a minimum, reiterate “further easing may be required”.

“If the Reserve  Bank was to appear reluctant to cut, as we saw from them in December and the RBA in August, then the Reserve Bank risks pushing the NZ dollar higher.”

Turner said the market currently has a 1.75% OCR mostly priced in by November, and sees a 1/3 chance of a further cut to 1.5% over 2017 – which was a fair reflection of the risks.

Kiwibank senior economist Zoe Wallis is also expecting the Reserve Bank to make further cuts to the OCR, after making a 25 basis point one next week.

She said the higher exchange rate is dampening the outlook for both growth and inflation.

This means a greater extent of policy stimulus is required to ensure inflation gets back toward the midpoint of the Reserve Bank’s 1-3% inflation target in the next couple of years.

“As such, we expect additional 25bp rate cuts in both November 2016 and February 2017 - taking the OCR down to a new record low of 1.50%.

“The Reserve Bank could also illustrate a downside scenario where the OCR could be cut even further (i.e. below 1.50%) – particularly if the exchange rate remains at currently elevated levels over the year ahead.”

A 25 basis point OCR cut next week is in the bag, according to Westpac acting chief economist Michael Gordon.

The Reserve Bank’s recent economic update statement makes it all but certain there will be a cut next week and that a willingness to go further will be signalled, he said.

“We expect the 90-day rate projections to imply a low point for the OCR of 1.75%, compared to 2% in the June MPS, paving the way for another rate cut in November.”

Gordon said the big change over the last two months has been the steep rise in the New Zealand dollar, which is now 6% higher than the Reserve Bank assumed it would be.

“Consequently, a lower interest rate path is needed to keep overall inflation on track to return to the target over the medium term.

“Our judgement is that the stronger exchange rate, along with other developments since June, is probably worth closer to a 25-point than a 50-point reduction in the Reserve Bank’s interest rate projections.

“However, we acknowledge that the risks are towards a larger reduction in the interest rate track.”

Westpac now expects a further OCR cut this year, most likely in the November MPS, to a low of 1.75%, he added.

First NZ Capital director of economics and strategy Chris Green also expects the Reserve Bank to make another 25 basis point cut to the OCR in November.

However, the rest of the economists who responded to the mortgagerates.co.nz survey expect the OCR to trough at 2.0% next week.

TD Securities head of Asia-Pacific research Annette Beacher added that the Reserve Bank’s bank bill forward guidance needs to be lowered a little, otherwise a cut next week will look like a hawkish cut.

Tags: ASB interest rates Kiwibank OCR OCR forecasts RBNZ Reserve Bank Westpac

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