Major bank predicts 2 year hold on OCR

by Maya Breen27 Jan 2016
With the Reserve Bank to make their announcement tomorrow on the first official cash rate review of 2016, BNZ Bank's chief economist Tony Alexander says he expects the OCR to stay put for the next two years. 

This is in contrast to other economists, including Westpac, ASB and HSBC who have forecast cuts at some stage this year.  

The country’s weak inflation below the mid-point goal of the central bank's target band of 2% is the main reason why economists say the already record low official cash rate of 2.5% will drop further this year. 

“While there is a chance the Reserve Bank will cut again, we think they are fairly reluctant to do that and risk reigniting the housing market,” BNZ’s Alexander told NZ Adviser

“We have just lifted our growth forecasts for the next couple of years from near 2% to 2.4%, so we think the economy has got some good momentum and the Reserve Bank will simply be wary of overstimulating things.

“Given that we have a very low inflation environment globally we don’t think they’ll want to shift it for quite some.”

In their latest economic update, Westpac stands by their forecast that the OCR will drop below 2.5% in 2016 because of lower than expected inflation and a slow down in the housing market and New Zealand economy.

"Inflation came in at just 0.1% for the whole of 2015 which was actually slightly weaker even than our forecast,” said Westpac's chief economist Dominick Stephens.

“It's true that low petrol prices are the main driver there but there's also evidence that the falling New Zealand dollar is not really flowing through to as much inflation as might have been expected."

Stephens says they forecast the first OCR cut for June 2016 but there may be a risk of the Reserve Bank making a cut in March.

“We expect the Reserve Bank to cut the OCR by an additional 50bp over 2016. We may see more people expecting low interest rates as we get further into 2016,” ASB chief economist Nick Tuffley said.

NZ Adviser reported earlier this week that HSBC's chief economist Paul Bloxham said he expects the Reserve Bank will hold on Thursday but may have scope to cut rates later in year. 

“We do think that they will have an easing bias by the fact that inflation is still too low.”  
    
After Thursday’s announcement, the second OCR review is set for 10 March 2016.

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