The Reserve Bank is likely to acknowledge the presence of increased global and domestic risks in its latest Official Cash Rate (OCR) announcement next week, according to economists.
While the chances of an OCR hike or cut still remain low, economists say that risks “have shifted further to the downside” and the risk of an OCR cut cannot be ruled out. Despite this, the outlook has not been adjusted and the OCR is still predicted to remain at 1.75% until 2021.
ASB chief economist Nick Tuffley says that a lot has happened since the delivery of the February Monetary Policy Statement only six weeks ago, and that there is a “clear need for reassurance” on the part of government policy institutions.
“Concerns over the health of the global economy have grown, global central banks have become more dovish, the tenor of domestic and global data has waned and the domestic mood is sombre following the terrorist attacks in Christchurch,” Tuffley said.
“At this time there is the clear need for government policy institutions to stay on message to provide continuity and reassurance. As such, we expect the RBNZ to hold the Official Cash Rate at its 1.75% record low and pledge to maintain the OCR at expansionary levels for a considerable period (likely till 2021). While the RBNZ may acknowledge that risks have shifted further to the downside, the outlook remains reasonable.”
Tuffley said questions will still be raised around economic activity and business confidence, both of which have become weaker in the short time since February. But with record-low interest rates, higher government spending and a strong labour market, Tuffley says there is still reason to be optimistic.
“There is time to wait and see how the forthcoming data and events will unfold,” Tuffley said. “Our core view is that the RBNZ hold the cash rate at 1.75% until early 2021, with the balance of risks tilting towards a lower OCR.”