Official cash rate looks likely to drop lower

by Maya Breen08 Aug 2016
With the Reserve Bank set to issue its next monetary policy statement on Thursday, the markets are predicting a hundred per cent chance of a cut of 25 basis points to the official cash rate, which would bring it down to 2%.

The cash rate was last cut back in March by 25bps but there have been suggestions that this time it might drop by 50bps. 

ANZ economists stated in an update they are expecting a 25bps cut but see a 50bps cut as unlikely.

“We struggle to see the rationale for a larger move when the economy is performing well. Historically, the RBNZ has delivered larger cuts only in “emergency” situations – hardly the case at present. 

“But we expect an explicit easing bias to be retained, with the bill projection implying at least one more cut, and alternative scenarios reinforcing more if required.”

ASB chief economist Nick Tuffley is also expecting a cash rate cut this week and sees the OCR drop to 1.75% by November or lower, if the NZD continues to hold up and the inflation outlook remains weak.  

“We don’t see inflation exceeding 1% until the second half of 2017, at which point inflation will have been below 1% for nearly three years,” Tuffley said in the latest ASB quarterly economic forecast.

“The additional investor lending restrictions the RBNZ is introducing give the Reserve Bank a little more room to address low inflation with a reduced risk of inflaming the housing market further.”

He said New Zealand’s housing market will “cool to a simmer” as the Reserve Bank’s new lending restrictions leave their mark. 

“The sort of price growth a number of regions have experienced over the last couple of years will not be sustained. Expect 2017 to be much quieter on the housing front,” Tuffley said.

“House prices in Auckland may bounce slightly in the first half of 2017 after a likely soft end to 2016.” 

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