OCR Preview: Economists predict rate will stay on hold

Economists expect the Official Cash Rate will remain on hold this week, but many believe the Reserve Bank will open the door to lower or negative interest rates.

Monday, May 11th 2020, 8:22AM

This week's Monetary Policy Statement and OCR announcement is the first since the Reserve Bank made an emergency cut to 0.25% in March.

The unprecedented cut of 50 basis points came during the onset of the Covid-19 crisis. Economic conditions have deteriorated significantly since.

Economists taking part in TMM's OCR Preview Survey unanimously predict the OCR will remain at that level — for now.

Some, like UBS's Robin Clements, are 100% sure the OCR will remain at 0.25% this week. Others, like Donal Curtin of Economics NZ, give a 60% chance. Michael Reddell gives a 65% probability.

Clements expects the Reserve Bank to "reaffirm its guidance" that the OCR will stay put for 12 months.

Curtin, on the other hand, says "there's a good chance of a cut to 0% or even lower".

Kiwibank's Jarrod Kerr expects "The RBNZ is likely to relax their language around the likely path of the OCR. I believe they will open the door to the possibility of negative interest rates. Although it’s a door I hope they don’t have to step through."

Brad Olsen of Infometrics added: "Although the Bank painted itself into a corner in March by issuing firm forward guidance that it will “keep the OCR at this level for at least 12 months”, we made the point at the time that “emerging pandemic developments may well force the bank to cut again”. We stand by this view."

More than half of the economists who took part in our survey expect the Reserve Bank to discuss the possibility of negative rates for the first time.

Kiwibank's Kerr said: "Negative interest rates is a path the RBNZ is openly considering. And I expect the RBNZ to further discuss the possibly of cutting into negative territory. I would put the risk of negative interest rates at an uncomfortably high 40% chance in response to Covid-19."

Curtin said negative rates were "a real possibility" eventually, but added it was "very hard to put any degree of probability around it".

Tags: ANZ Kiwibank OCR OCR forecasts