Low interest rates to stay for 2-3 more years, major bank says

by Maya Breen16 Nov 2015
New Zealand will see a low interest rate environment stick around for another two to three more years, ASB Bank has stated in its Quarterly Economic Forecasts for November.

Low inflation and a subdued global backdrop are the major reasons for low interest rates to hold on with ASB chief economist Nick Tuffley saying the bank’s economic outlook is for moderate growth, although the economy still faces a number of risks.

“We expect overall growth to slow to a low of 2.1% in early 2016 before gradually recovering through the twin tailwinds of lower interest rates and exchange rates,” Tuffley says.

“We still fully expect growth to recover over 2016, and much of the seeds for this future growth have already been sown through the considerable fall in the NZD and string of interest rate cuts.” 

“In fact, our inflation outlook is so low now that it is screaming out for us to forecast lower interest rates than we are.” 

A cut to the official cash rate to 2.5% in December is likely with a mild inflation outlook providing scope for the Reserve Bank to cut the OCR below 2.5% over the course of 2016, the report stated.

If the RBNZ doesn’t cut below 2.5% next year, the ‘world won’t end’ according to the report. 

“But, in the absence of OCR cuts, we sense a foregone opportunity for the economy to grow a little faster in an environment of benign inflation.”

“In our view, inflation will struggle to rebound to 2%. Either the RBNZ will respond by cutting interest rates further, or simply accept that both inflation and growth outcomes could have been more optimal. 

“Additional OCR cuts next year will depend on whether inflation duly proves to be more subdued than expected and on how soon the RBNZ comes to that realisation – the sooner the more likely it is the RBNZ responds,” the report stated.

General Finance also said in its fortnightly mortgage commentary note that rates will be cut before Christmas, namely due to rising unemployment levels signalling a slowdown in growth; the high exchange rate; and subdued dairy prices.

Tuffley says they are keeping a close eye on global risks, even though New Zealand’s growth outlook with its key trading partners remains reasonable. 

“Question marks still hang over China’s growth outlook. Looming US interest rate increases have increased nervousness about the potential impact of capital flight on emerging economies, and rising servicing costs of USD-denominated debt.”

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