Is a negative OCR still on the table? Economist predicts new endpoint

by Ksenia Stepanova25 Nov 2020

ASB is no longer predicting a negative Official Cash Rate (OCR) in 2021, and is now forecasting an OCR endpoint of 0.10% - a 15bps cut from its current 0.25%.

ASB senior economist Jane Turner says the new prediction “seems reasonable” considering New Zealand’s current risk profile. She also expects to see a “widening divide” between the steadily moving New Zealand economy and slower signs across the globe, as other nations re-enter lockdown and tighten their COVID-19 restrictions.

Turner also noted that the Reserve Bank would likely reinstate its loan-to-value restrictions next year, putting a limit on the amount of high-LVR home loans banks are able to offer – another indicator of the economy’s resilience.

Read more: Economist calls for “rational” fiscal policy to fix house price bubble

“We no longer expect the RBNZ to take the OCR below zero in 2021 and have pencilled in a 0.25% OCR until mid-2023, given the resilience being displayed by the New Zealand economy and the expectation that the RBNZ Funding for Lending Programme will help lower interest rates for borrowers within the economy,” Turner said.

“The outlook is highly uncertain, with scope for heightened volatility over the next few months.”

“Current market pricing has about 15bps of cuts, and an OCR endpoint at around 0.10% which seems reasonable in light of the risk profile and our new OCR view,” she added.

“The RBNZ has thrown down the gauntlet to banks, implicitly tying the OCR to moves in customer lending interest rates. The more the latter fall, the less likely the need for the OCR to go lower.”

Turner says this week’s Financial Stability Report is “unlikely to provide much excitement” for banks, unless it reveals more details about the Reserve Bank’s Funding for Lending Programme (FLP). She says the Reserve Bank of Australia’s expected speech this week is also unlikely to create any major waves, with the RBA likely to focus on its asset purchase programme rather than OCR cuts.

Read more: Shorter-end mortgage rates expected to fall below 2% next year – ANZ

“This is expected to largely be a factual summary of what has taken place and the impact of the decisions made,” Turner said.

“The next step for the RBA will be in early 2021 to decide if further support is required, most likely in the form of an extension to it’s AU$100 billion bond buying program. We are currently more optimistic than the RBA on the economic outlook for 2021.”

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