Strong comeback could affect OCR outlook
The strong reopening of the New Zealand economy could make the Reserve Bank less likely to slash the official cash rate further, according to Westpac economists.
Monday, June 15th 2020, 3:47PM
Dominick Stephens
The Westpac team, led by chief economist Dominick Stephens, believe the nation's re-emergence from lockdown and "related upside surprises on activity" raise questions "about whether so much further stimulus will be required".
For now, the bank has stuck to its prediction the OCR will fall to -0.5% early next year, coupled with an expansion of the LSAP programme. The bank says a higher exchange rate could counter the economic data and push the Reserve Bank towards making more cuts.
"We continue to forecast that the RBNZ will need to expand the LSAP to $100 billion and cut the OCR to -0.50% by early next year, although we do have to acknowledge that there are uncertainties around the mix of monetary policy," Westpac economists said in their latest weekly outlook.
Their prediction comes as the central bank prepares to make an OCR decision next week. The RBNZ isn't expected to cut interest rates and has doubled down on its commitment to keep the OCR at 0.25% until next March.
Westpac doesn't believe the LSAP programme will be enough to stimulate the economy on its own.
"Even if the RBNZ buys all the NZ Government Bonds except the $60-$70 billion required to maintain market liquidity, it still will not generate enough monetary stimulus to meet its inflation target. Hence we conclude that another tool will be required. The most likely candidate is a negative OCR."
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