ASB now calling for two OCR rate cuts
ASB economists have changed their view on the OCR and gone from a 50:50 chance of an interest rate cut to predicting the Reserve Bank will cut the cash rate two times this year.
Thursday, May 7th 2015, 11:22AM
Chief economist Nick Tuffley says it is time for OCR cuts due to changes in future inflation risks.
"We have now moved to forecast the RBNZ will cut the OCR later this year, having since mid-January ruled out OCR increases for the “foreseeable future”. We believe the risks of inflation taking too long to make a sustained return to the 2% mid-point of the inflation target have now got high enough to warrant a response.
"Accordingly, we think the RBNZ will give inflation a nudge up through 50bp of cuts, most likely 25bp in each of September and October. But an earlier start is conceivable."
"We put a 60% probability on any cuts occurring. The outcome is as much about the extent to which the RBNZ’s inflation forecasts start to fall as it is about how strictly the RBNZ interprets its fuzzy “on average over the medium term” inflation target. But the risks are skewed to inflation remaining low relative to the target band; there is very little risk of inflation overshooting the target.
The main risk from a lower OCR is the housing market through the likelihood of added price growth. Even there, we would expect the RBNZ to keep working on making the financial system even more resilient, while exhorting local and central government to do more to address the root causes of Auckland’s housing imbalance.
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