ASB economists expect OCR to remain unchanged until 2022

by Roxanne Libatique18 Feb 2020

Economists’ official cash rate (OCR) predictions turned out to be correct as the Reserve Bank of New Zealand (RBNZ) recently decided to keep the OCR at its current level. Now, ASB economists expect that the OCR will remain at its current level until 2022.

Economists revealed in ASB’s Economic Weekly report that they no longer expect a 25bp cut for the rest of the year as New Zealand’s economy continues to be reasonably well placed. With the central bank showing a small reluctance to move settings due to increased fiscal stimulus, it would not be surprising if the OCR would remain unchanged until 2022.

“We now expect the OCR to remain at 1.00% until 2022, followed by a series of mild OCR hikes and a 2.25% endpoint this cycle. We also have edged up our other NZ Interest rate forecasts accordingly,” the economists wrote on ASB’s Economic Weekly report.

They also noted the possible short-lived impact of the coronavirus outbreak on the economy, saying: “If the coronavirus outbreak turns to have longer-lasting impacts globally or if it reaches NZ, the economic hit to NZ would be greater, and the OCR would likely move lower.”

“Moreover, we remain sceptical that the NZ economy will accelerate to the degree that the RBNZ expects from the June quarter of this year.”

Read more: House prices expected to rise in 2020

The ASB economists expect the next OCR tightening phase and rate policy interest rate cuts by other central banks in 2022.

“The exact timing of future OCR hikes is fluid and conditional on domestic and global developments. We expect a historically-low OCR endpoint of just 2.25% this cycle from early 2024,” they said. “This is in a similar ballpark to our estimates of the neutral OCR. Risks are skewed towards the OCR remaining on hold for longer and a more gradual path of policy tightening.”

They also expect long-term New Zealand yields to increase. However, they admitted that yields could decline if risks of a weaker global outlook were to crystallise.

“We still expect NZ and global long-term interest rates to remain historically low over the next few years, given protracted low global inflation and the global expansion remaining heavily dependent on policy support,” the economists continued.

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