Westpac has shifted its Official Cash Rate (OCR) forecast, and is now predicting no change in the OCR until 2021. The bank had previously forecast a hike from November 2020.
Westpac also expects the Reserve Bank of New Zealand (RBNZ) to say something similar to “the next move could be up or down” in its OCR announcement tomorrow, and says RBNZ’s OCR forecasts will remain neutral until 2021.
Westpac chief economist Dominick Stephens says the main driver behind the change in forecast is New Zealand’s construction outlook, which now looks like it will peak in 2019 and start declining from 2020. He says there is also evidence that the economy ‘lost momentum’ in 2018.
“We expect RBNZ to follow its US and Australian counterparts this week, and return to a neutral outlook for monetary policy,” Stephens stated. “In its last missive, the Reserve Bank said it expected to keep the OCR on hold through 2019 and into 2020. However, it dropped the phrase that “the next move in the OCR could be up or down,” and forecast very gradual OCR increases from mid-2020.”
“This week we expect the reintroduction of language very similar to “up or down.” The RBNZ may underscore its change of view with something like “We expect to keep the OCR on hold over the whole of 2019 and 2020, longer than previously projected.” And we expect the RBNZ’s OCR forecast will be flat until around mid-2021 instead of mid-2020.”
Stephens says that in addition to the changes in construction sector forecasts, Westpac’s revised outlook is also due to a higher than expected exchange rate and Stats NZ’s ‘dramatically revised’ outlook on net migration, which found that the population was smaller and growing slower than previously thought. Although financial markets are pricing at an 80% chance that the OCR will be cut by the end of 2019, Westpac says that this is ‘overestimating the odds’ and that the economy is in an ‘extraordinarily ordinary position’ and will likely regain some momentum by the end of the year.
“Today we are shifting our OCR call,” Stephens concluded. “We are now forecasting no change in the OCR over 2019, 2020, and 2021. That is as far as the proverbial eye can see – what we are really saying is that the OCR outlook is evenly balanced over the foreseeable future, with risks on both sides.”