“Subpar” growth yields strong case for another OCR cut

by Ksenia Stepanova08 Nov 2019

The Reserve Bank’s next OCR announcement is less than a week away, and the expectation is that we will see a 25bps cut with potential further cuts in 2020.

ASB senior economist Mark Smith says there is a “strong case” for cutting the OCR, as the risks are largely skewed to the downside and the short-term growth outlook isn’t strong. Smith says that a 0.75% OCR us “unlikely” to be the floor of the OCR, and we can expect more cuts next year.

“Recent financial market sentiment has perked up, the global scene is looking a little brighter and global interest rates have firmed,” Smith explained. “The message from global central banks is becoming more nuanced.

“However, the growth outlook for the New Zealand economy still looks subpar, which should prompt the RBNZ to consult its regrets analysis manual and decide to take out additional insurance to keep the economy on track.”

Smith says he expects the Reserve Bank’s statement to leave the door open to potential further cuts, as the recent uptick in global financial markets is not likely to last and New Zealand’s growth “continues to disappoint.” He says higher bank capital requirements may also have a more significant dampening effect on the economy than what the Reserve Bank expects.

“We expect the policy assessment to be direct, outlining the rationale for the November cut,” Smith said. “Importantly, we expect the statement to keep the door open to further policy stimulus, if necessary to meet the RBNZ policy objectives.

“To close that door would put a rocket under the NZD and push NZ wholesale interest rates higher at a time when the RBNZ wants to keep monetary conditions accommodative.”

Smith says that the information omitted from the Monetary Policy Statement is as much a key focus as what is included. He says the MPS is unlikely to include any assessment of its bank capital requirements, or to make any changes to its estimates of a neutral OCR, and that its NAIRU estimates are likely to be too high. All of these factors point to a lower OCR profile over the longer term.

Most Read

NZ Adviser TV