“Real” risk of OCR cut: Westpac

Economists at Westpac believe there is a “real” chance the Reserve Bank could cut the OCR rate, following last week’s dovish forecast.

Monday, August 13th 2018, 1:49PM

by Dan Dunkley

The Reserve Bank surprised the market last week by signalling it may not raise the OCR rate until September 2020, due to slow economic growth. The central bank continued to suggest the OCR could move “up or down” depending on the strength of the economy and inflation figures.

Westpac economists, led by Dominick Stephens, believe the Reserve Bank’s interest rate projections “have made clear the extent to which the ‘down’ scenario is a real prospect”. The economists said they were “taking seriously the possibility of a rate cut within the next year, and we think that financial markets should too”. The bank says financial markets currently place a 20% probability on a rate cut within the next year.

Westpac says the Reserve Bank’s downside scenario of slower GDP growth could see it fall short of inflation and employment targets, warranting a “substantially lower OCR”.

The economists said the potential for a rate cut was “reinforced” by RBNZ assistant governor John McDermott last week. In an interview, McDermott said the central bank had been “been pushed nearer to that trigger point”, adding he needed to see stronger September GDP figures to be convinced “it is on the right track”. Westpac said the comments indicated “the risk of an OCR cut is real, but not imminent”.

The economists said financial markets had removed pricing for an OCR hike, paving the way for cheaper borrowing in the near-term.

Westpac believes New Zealand GDP will pick up ahead of the Reserve Bank's projections, however. Its data suggests June GDP growth of 1%, ahead of the central bank’s 0.5% forecast. The lender also expects inflation in the September quarter to increase 0.7%, ahead of the central bank’s 0.4% estimate.

Tags: OCR OCR forecasts Westpac