Negative OCR still needed - Westpac

Despite fears of an overheated housing market, Westpac economists believe the Reserve Bank will still need to lower the official cash rate next year.

Tuesday, October 20th 2020, 6:16AM

by Dan Dunkley

In their latest weekly report, the economists, led by Dominick Stephens, say the Reserve Bank will need to take further action due to a low inflation outlook.

The view comes despite record growth in the housing market, fuelled by Reserve Bank monetary policy since the pandemic.

The house price surge has sparked fears that the central bank could over-inflate asset prices in New Zealand with more rate cuts.

Westpac's economists admitted the housing market developments "call into question how much monetary stimulus the Reserve Bank really needs to deliver in order to meet its inflation and employment goals".

"Indeed, there have been questions around whether the RBNZ has already overcooked it," they added.

The economists said the buoyant housing market was "a mark" against a further OCR cut. But they believe the central bank remains likely to pursue a negative OCR next year.

The team said lower rates were necessary to prevent deflation taking hold, and would prompt people to spend rather than save following the economic shock.

"Given the scale of the Covid shock, the level of interest rates required to balance inflation (and by extension balance savings and loans) is much lower than most New Zealanders are used to," the group said.

"In fact, it’s lower than could be achieved with a positive OCR, so for now the Reserve Bank is using other methods of bringing interest rates down. But we think that the Reserve Bank will need to adopt further measures, such as a negative OCR, in order to keep interest rates low for as long as is needed."

Tags: banks Covid-19 house prices housing market interest rates investment Macro Prudential Tools market outlook Mortgage Rates mortgages OCR OCR forecasts property investment RBNZ real estate Reserve Bank Westpac

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