Emergency OCR cut: economists give their views

Economists believe the Reserve Bank will be reluctant to cut the OCR any further after it slashed rates by 75 basis points this morning.

Monday, March 16th 2020, 8:05AM

The OCR will remain at 0.25% for at least 12 months, as the government and central bank attempt to get to grips with the Covid-19 crisis.

ASB economists said the central bank's move puts the OCR at the same lower limit identified by Australia.

The RBNZ indicated 0.25% is likely to be the lower limit for this cycle, stating a "large scale asset purchase programme of New Zealand government bonds would be preferable to further OCR reductions".

ASB chief economist Nick Tuffley said the rate cut and commitment to keeping rates steady for 12 months "should help to suppress long-term interest rates".

ASB's team believe 0.25% will be the preferred lower limit of the OCR.

"The RBNZ looks set to explore unconventional tools rather than to test the limits of the OCR," they added.

Independent economist Tony Alexander urged caution on the economic outlook. He expects a recession, "but not like 1987 or 2008".

"Some people are claiming we are seeing a repeat of the 2008-09 global financial crisis, or aftermath of the 1987 sharemarket crash. Neither scenario is applicable, though in the travel and hospitality sectors this will be the worst decline they have ever seen."

BNZ painted a bleaker picture on the outlook.

"The rescue mission is underway but, even with this help, be prepared for a significant economic downturn. It’s time to batten down the hatches. This is going to be a very rough ride."

Brad Olsen of Infometrics said he was "glad to see something done, finally", and supported the Reserve Bank's plan to delay the introduction of stringent new capital rules.

Olsen believes the RBNZ could cut the OCR to zero if conditions deteriorate.

"We do believe there's potential for the Reserve Bank to cut rates again. If this goes further, it would be strange for them to ignore that lever. We do think there's scope for them to cut, despite the Reserve Bank's assertions."

Olsen added: "We are of the view that, despite the Reserve Bank’s position that the OCR will stay unchanged for 12 months, emerging pandemic developments may well force the bank to cut again."

Tags: OCR OCR forecasts RBNZ Reserve Bank