US election casts shadow over OCR response
Spectre of US election result looms over reaction to this morning’s OCR cut, but economists say it is too soon to say what impact it might have on the Reserve Bank’s future moves.
Thursday, November 10th 2016, 10:43AM
by Miriam Bell
The Reserve Bank’s 25 basis point cut to the OCR this morning came as no surprise to commentators and attention has now turned to the future.
Most economists are not changing the calls they have made – and continue to expect today’s cut to be the last.
But many noted that the results of the US election throw a wildcard in to the economic mix as global uncertainty is now set to reign for some time.
NZIER senior economist Christina Leung said it’s been a crazy 24 hours and volatility is the name of the game.
“The question of whether the market will settle and what might happen means that risks continue to exist.
“For that reason, we are comfortable continuing to forecast that there will be a further cut to the OCR next year – even though the Reserve Bank has indicated they are moving away from it.”
The Reserve Bank has retained an easing bias, although it is more neutral, Leung said.
“That leaves the door open for a further cut rather than just saying ‘this is it’ on the cut front.”
Kiwibank chief economist Zoe Wallis said the Reserve Bank’s statement indicated that it has definitely shifted to a more neutral bias on the OCR.
“Although there are still downside risks. And, obviously, the US election outcome is likely to lead to increased uncertainty. “
The Reserve Bank’s cut was expected by the market and priced in, Wallis said.
“So there is not likely to be much impact on wholesale rates and mortgage rates from today’s cut.
“What will be interesting to see is if the international environment could lead to an impact on wholesale rates.”
ASB chief economist Nick Tuffley said the cut and mild easing bias was in line with expectations, but they expect the OCR to stay on hold now.
“New Zealand’s economy is not an economy that is crying out for urgent stimulus to boost inflation, but the risks to the OCR remain skewed towards another cut next year.”
Key risks are the strength of the NZ dollar, any further weakness in inflation expectations, and any deterioration in the global growth outlook, he said.
“The change of US Presidency will also be a wildcard over the longer term, with its mix of potential fiscal stimulus and potential trade protectionism.
“There was no explicit mention of Donald Trump’s victory made in the statement. But like many, the Reserve Bank will need time to see what actually happens and how that changes the NZ inflation outlook.”
ANZ chief economist Cameron Bagrie said today’s cut was expected and the OCR forecast track suggests the Reserve Bank is done, with around a 20% chance of another cut built in.
“The last sentence of the assessment acknowledges that risk so we have a mild easing bias but nothing more. We think that is entirely appropriate.”
The economic outlook is more balanced and the strength of the economy is hard to ignore, he said.
“The risks are no longer solely to the downside, though they are skewed slightly that way.”
In Bagrie’s view, attention will now turn to how much of the OCR cut is passed on but he doubts it will be the full amount.
“Banks need more deposits and if that means deposit rates can’t fall, borrowing rates can’t either. The Reserve Bank likely won’t be too displeased with this mix.
“It means the OCR can be used to tackle the high NZD and offset tradable deflationary forces without needing to be overly concerned about boosting housing.”
Meanwhile, BNZ has already announced it will not be cutting its mortgage rates in response to this morning’s OCR cut.
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