ANZ is predicting three further OCR cuts in November, February and May, which would take the OCR to 0.25%.
ANZ chief economist Sharon Zollner says she would not rule out another cut in September, but that this is not the bank’s central view for the moment. This new stance is a result of weak global and domestic economic signals, and ANZ says there are seven key reasons why the Reserve Bank is likely to take a “pedal to the metal” approach.
These reasons include a slowdown in domestic growth, falling inflation expectations and a deteriorating labour market and global environment, as well as a troubled dairy sector and the potential consequences of the Reserve Bank’s proposed capital requirements going ahead. Zollner says the requirements may result in a “significant impacts” on the availability and price of credit, much more so than the Reserve Bank is anticipating.
“It does seem clear from public statements by Reserve Bank officials that a fairly hefty increase is coming, whatever the details may be,” Zollner said. “Our central estimate is that the changes as proposed would be worth 80bp off the OCR – and a decent chunk off growth despite this offset.
“New Zealand is experiencing a growth stall. It is important to note that as things stand here and now, there is no fundamental reason for the economy to go into recession, and the Reserve Bank is doing everything it can to make sure it doesn’t.”
Zollner says that the only clear upward risk at the moment is the housing market, which is ripe for growth given the record-low mortgage rates – however, even this is likely to be dampened by the Reserve Bank’s controls.
“The RBNZ is responsible for financial stability as well, and what the low OCR giveth, the LVR restrictions taketh away,” Zollner said.
“Any housing flurry might also get rudely interrupted if the labour market tightness dissipates as rapidly as the indicators are suggesting it might.”
Overall, Zollner says that each successive OCR cut will certainly have less impact than the last – but that the Reserve Bank will “throw all they’ve got” at it. The endpoint for the OCR cuts will be at the limit of where its effectiveness ends, and from there, the Reserve Bank will have to come up with more “unconventional” monetary policy to achieve the same effect.