OCR could fall below 1% - Westpac

Westpac has predicted that the Official Cash Rate (OCR) will be cut in August and then in November, bringing it to an all-time low of 1% with the potential of it being cut even further.

Westpac chief economist Dominick Stephens says there is also a possibility of the Reserve Bank cutting the OCR in September, depending on how weak the labour market gets. If this happens, there is a chance that the OCR could drop below 1% - a reflection of two years of economic slowdown for New Zealand.

This latest call by Westpac is skewed towards earlier and more aggressive cuts by the Reserve Bank, as the domestic economy has “clearly slowed further than anticipated.” With potentially lower fixed mortgage rates on the horizon, Stephens says the bank will also be reassessing its house price forecasts in August.

“We think [the Reserve Bank] will respond to these latest signs of weakness by cutting the OCR in August, and stating that they might cut the OCR further, depending on the data,” Stephens stated. “We expect that the RBNZ’s published forecasts will show the OCR dropping to 1.1%, implying a good chance (but not a certainty) of another cut.

“If we are correct, retail fixed interest rates are going to fall even further. Lower mortgage rates will strengthen our call for a housing market upturn over the year ahead.”

If the labour market remains weak, the Reserve Bank may choose to cut the COR in September, potentially going even further and cutting it to 0.75% in November. However, Stephens says Westpac’s central forecast is of a 1% OCR to be delivered in November, with slow increases beginning again in 2020.

“We expect the Reserve Bank will be slowly hiking the OCR again in the early 2020s, although our tentative start date for OCR hikes is now mid-2021,” Stephens stated.

“That is later than previously forecast, because interest rates are going to have to stay low for longer than previously thought in order for the Reserve Bank to achieve its inflation and employment targets.”