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Slashing OCR has worked, economist says

The OCR is low and poised to get lower but Westpac’s chief economist doesn’t believe that means concerns about a negative OCR are warranted.

Wednesday, August 28th 2019, 4:35PM 1 Comment

by Miriam Bell

Speaking at the Financial Advice New Zealand conference this week, Westpac’s Dominick Stephens said that while he is picking the Reserve Bank to cut the OCR to 0.75% in November, it’s unlikely they’ll need to take it to zero or under.

That’s largely because the Reserve Bank’s recent slashing of 50 basis points from the OCR, taking it to its current record low of 1.0%, has been incredibly effective, he said.

“There hasn’t been a one-on-one pass through of the cuts to retail but there has been a massive drop in the rates that really matter for the economy and those are the fixed mortgage rates.

“The Reserve Bank has engineered that by convincing people that they are going to keep interest rates low for a long time.

“Anyone who says that the OCR cuts to date haven’t been effective is wrong.”

However, a further cut to the OCR is not likely to have the same economic impact because its moves so far have already had a huge effect on expectations for the future.

Stephens said that for further cuts to achieve the same effect it would require more work from the Reserve Bank but it wouldn’t be impossible.

“The OCR can go negative – but there is a limit to how far it can go.”

He pointed to Europe as an example as banks ended up having to pay the central bank to hold the reserves that they were required to hold.

“That was a cost to them. So, in response, they started putting mortgage rates up to recover those costs.”

Cash hoarding is another big risk from negative interest rates and, for these reasons, Stephens thinks if a negative OCR was to become a reality, it would be not far below zero.

“It would be in the order of -0.5%. And if the OCR reached that level, it’s likely that the Reserve Bank would turn its focus to other unconventional measures, like quantitative easing. It does have options.”

But one outcome of increasingly lower interest rates – and the concurrent search for yield – will be that New Zealanders will, once again, start looking to property as an investment, Stephens added.

“I am absolutely of the view that the housing market will respond to these low interest rates, despite policy constraints like the foreign buyers ban. So I think we are looking at about 7% growth over the next year.

“If it does respond, the first thing we would see is an increase in sales and there is tentative evidence of a pick-up in sales now. But we will see over the next six months.”

Over the long term, this could be a concern as it is likely to prolong the cycle of ever-raising debt prompted by rising prices and people borrowing more.

Stephens said this cycle can’t last forever and when it ends things could get ugly but, at this point, he thinks monetary policy will work.

“Long term, I think the bigger risk is interest rates rising due to inflation ramping up. That could get people into trouble when it happens but I can’t see it happening any time soon.”


Tags: banks Dominick Stephens FANZ annual conference house prices housing market interest rates investment mortgages OCR OCR forecasts RBNZ Reserve Bank Westpac

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Comments from our readers

On 30 August 2019 at 2:17 pm Eyeinthesky said:
Spoken like a true bank economist. There are so many quotes in this article I would love to challenge, but space doesn't allow.
The policies of central banks have been responsible for economic inflation and deflation for the last hundred years, in a predictable manner.

This is possibly the most poignant quote in this article;

“Long term, I think the bigger risk is interest rates rising due to inflation ramping up. That could get people into trouble when it happens but I can’t see it happening any time soon.”

Given our own RBNZ doesn't look more than 3 years into the future, and the reality is, it has virtually no tools available to stop a recession/depression recession/depression,a long time might be soon.

And yes, it will be ugly. Like nothing we have seen before.

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Westpac 5.94 5.95 6.29 6.59
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