More OCR cuts to come - ASB

Further OCR cuts will be needed for the Reserve Bank to get the economic stimulation it needs, ASB predicts.

Monday, March 21st 2016, 11:34AM

Responses to the recent OCR cut indicate the Reserve Bank will need to make two more cuts to the OCR this year for it get traction on inflation, in ASB’s view.

The Reserve Bank’s March cut, of 25 basis points, took the OCR to a historic low of 2.25%.

But ASB’s chief economist Nick Tuffley said events since then show the Reserve Bank is not likely to get the stimulatory response to the cut that it would have hoped for.

Several benchmark lending rates have not fallen as much as the Reserve Bank clearly expected them to, he said.

This is largely due to rising funding costs for banks.

“Moreover, the Reserve Bank again runs the risk that the NZD holds up at a higher level than it has assumed, continuing to undermine the extent to which inflation will pick up in the future.”

For these reasons, ASB now expects two final OCR cuts, to take the OCR to 1.75%.

Tuffley said the cuts are likely to come in June and August – although there was a very lineball call for the next move to come in April.

However, the Reserve Bank’s decisions are always event-dependent, he said.

To this end, reported inflation, inflation expectations, and the broader economic outlook are key events ahead, while the NZD will remain pivotal.

Another important factor will be the housing market’s response to lower interest rates, Tuffley said.

“Any signs of a resurgent Auckland market or a boom taking root elsewhere would temper the Reserve Bank’s hand.”

There is a “perverse” risk that the lack of traction in lending rates discourages the Reserve Bank from cutting to the extent ASB now envisaged, he added.

“But to assess that risk we ultimately have to fall back on the message from our inflation outlook. 

“That is, action is required if the Reserve Bank is to have confidence it will meet its inflation objective with an acceptable safety margin.”

Tags: ASB banks interest rates OCR OCR forecasts RBNZ

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