by Miriam Bell
There appears to be a collective consensus among economists who responded to the regular mortgagerates.co.nz survey that the OCR will stay unchanged at 2.0% this week – but a cut will come in November.
For many of the economists, this view was supported by the release of strong GDP figures, which show the New Zealand economy is growing solidly, yesterday.
Westpac senior economist Anne Boniface said that the GDP data combined with the higher NZ dollar and improved export prices meant the outlook for interest rates and inflation is likely to be much the same as in August.
“Accordingly, we think the Reserve Bank will leave the OCR on hold next week, but continue to signal that a rate cut is likely in November.”
Infometrics economist Mieke Welvaert said the GDP result gave impetus for the Reserve Bank to keep the OCR on ice next week, but it is likely to continue signalling a cut to 1.75% in November.
Such an action may seem strange, given that economic growth prospects have improved, she said.
“But as inflation expectations continue to languish at a low level and with markets having strongly priced in the prospect of a cut, we think the Reserve Bank has been backed into a corner.
“In an effort to maintain credibility on the inflation-targeting front, we think they will feel compelled to act in line with market expectations and cut the official cash rate in November.
“To do otherwise is to risk knocking inflation even lower.”
Many of the economists agreed that inflation, as opposed to economic growth, was driving the Reserve Bank and this means a cut in November, and possibly another at a later date, was on the cards.
Kiwibank economist Jeremy Crouchman said the Reserve Bank’s primary mandate is to keep annual inflation between 1-3%, with a focus on keeping future average inflation near 2%.
“In the June quarter, CPI inflation came in at 0.4% year-on-year and we see a good chance that inflation will take a backward step in the September quarter.
“A stubbornly high exchange rate suggests future inflation is likely to remain weak and that justifies further policy stimulus.”
He said Kiwibank expects the Reserve Bank to make two more cuts to the OCR – one in November, one in February 2017 – taking it to a terminal rate of 1.5% in this cycle.
ASB senior economist Jane Turner said that, given strong GDP and dairy prices, the Reserve Bank may be more reluctant to cut the OCR below 1.75% next year, after cutting in November.
“Nonetheless, in light of continued weak inflation, and despite strong growth, we continue see a high chance of a further cut next year should inflation indicators continue to print on the weak side.”
ANZ, the NZ Institute of Economic Research and First NZ Capital are also expecting two further cuts to the OCR – in November and then again early next year - to take it to an unprecedented low of 1.5%.
However, while there was unanimous agreement that a cut to 1.75% is coming in November, some of the other economists were not convinced a further cut would follow that.
Both Welvaert and UBS New Zealand senior economist Robin Clements expect the OCR to trough at 1.75% in November.
Harbour Asset Management head of economics Christian Hawkesbury said the headwind is for the Reserve Bank to remain on the easing track that they have been on.
“But, for us, the balance of risks is skewed towards one more cut as opposed to the Reserve Bank taking the OCR to 50%.”
HSBC chief economist Paul Bloxham, who has suggested New Zealand’s economy is set for a “rock star revival”, held a similar view.
He said the Reserve Bank may have to cut the OCR just a bit further, given inflation remains below target and the NZD is high.
“We see the Reserve Bank cutting its cash rate to 1.75% in Q4, but have them on hold in the subsequent quarters.”
Meanwhile, several of the economists made mention of the Reserve Bank’s new LVR rules.
Welvaert said they have essentially freed up the Reserve Bank to pursue looser monetary policy settings without worrying as much about financial stability risks brought on by the housing market.
Crouchman said there are some signs the new LVRs are starting to cool the rate of house price appreciation.
For this reason, Kiwibank will be looking for further reference to developments in the housing market from the Reserve Bank next week.
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