September OCR: “never say never again”

Economists are not ruling out another surprise cut

September OCR: “never say never again”

With the Reserve Bank’s next Official Cash Rate (OCR) announcement less than a week away, ASB economists say they are not expecting any movement – but, never say never again.

ASB chief economist Nick Tuffley says that after August’s surprise drop of -0.50, he wouldn’t rule anything out. He is still predicting a 25bp cut in November, and says there is a “long list of reasons” why the OCR could continue to fall in 2020.

Tuffley says that although the 50pb OCR cut was a surprise, that doesn’t mean the economists got it wrong – a 1% OCR was expected, but was just expected to happen at a slower pace.

“After the August 50bp OCR cut, which universally surprised with its size, a lot of people have said “well, you got that one wrong”. To which I have replied “no, we got it half right”, which (mathematically) is correct,” Tuffley explained.

“The case for easing to 1% was clear, but most of the market community had expected it would be done gradually rather than in one hit.

“Has the urgency to cut further remained? We think not, but the lesson is: Never Say Never Again.”

Tuffley says that the 50pm cut successfully engineered a substantial easing of monetary conditions, with the NZ dollar easing slightly since August and wholesale and fixed-term mortgage rates dropping.

However, he says that most other developments – the US-China trade war, Brexit, inflation pressure and low domestic business confidence – will all give the Monetary Policy Committee “cause for concern.”

ASB is now predicting a terminal OCR of around 0.60%.

“Although the RBNZ may be happy with the financial market reaction to its 50bp cut, it will be less happy with the “hearts and minds” response,” Tuffley said. “Both business confidence (in a survey that straddled the cut) and consumer confidence have subsequently weakened.”

“The key message is: be on the lookout for further decisive action from 002 The Terrace. Any one of the above [issues] could prompt MPC to terminate the risks with extreme prejudice.”

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