"Shock" outbreak could result in negative OCR – economists

by Roxanne Libatique15 Jul 2020

“Shock” COVID-19 outbreak could force the Reserve Bank of New Zealand (RBNZ) to drop the official cash rate (OCR) below zero, according to Kiwibank economists.

Kiwibank economists said in their weekly report that community transmission and another lockdown could cause the “RBNZ to embark on a path below zero” – with the worst-case scenario being a 75 basis point cut to -0.50%, according to Good Returns.

Jarod Kerr, the chief economist at Kiwibank, said they expect the RBNZ to continue implementing its quantitative easing programme unless conditions direly change. They also predict steady wholesale swap rates next year, near 0.25% as the “RBNZ's on-hold guidance likely extends into 2022.”

Read more: Advisers remain cautious about the lending market

The Kiwibank economists' predictions reflect the results of the Finder RBNZ Official Cash Rate Survey, revealing that 31% of 16 experts and economists predict a negative OCR in the coming months and 12% expect an OCR cut in September.

“The RBNZ has signalled it is prepared to take the OCR lower if needed – even into negative territory – so we can expect this to happen. I would not be surprised if they made that move at their next meeting,” said Dr Oliver Hartwich, the executive director of the New Zealand Initiative.

UBS economist Robin Clements added: “There is some risk of the OCR going lower in the next 12 months. Otherwise, the OCR will go higher but probably not before the end of 2021.”

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