sign up log in
Want to go ad-free? Find out how, here.

ASB economists change call and now pick low point for official interest rates of 2% next year; rate cut next month 'a done deal'

Bonds
ASB economists change call and now pick low point for official interest rates of 2% next year; rate cut next month 'a done deal'

ASB economists have changed their call and are picking that the Reserve Bank will be forced to drop official interest rates as low as 2% by mid-2016. They also see a rate cut next month as now "a done deal".

The change to forecast, highlighted in ASB's Economic Weekly newsletter, means ASB has now joined Westpac among major banks whose economists see interest rates ending up much lower than others have predicted and the RBNZ itself appears to currently believe will be necessary.

Westpac economists have for some time been picking a low of 2% in the Official Cash Rate (compared with its current actual level of 2.75%), though did recently move their anticipated timing of such cuts further into 2016. The RBNZ has indirectly indicated it sees rates bottoming out at 2.5%, which was where ASB and others have been picking.

But ASB chief economist Nick Tuffley says the ASB economics team's now expecting that the RBNZ will cut the OCR three more times: at the upcoming Monetary Policy Statement on December 10, then again in June and August 2016, bringing the OCR to a low of 2%.

"For some time we have had substantially weaker inflation forecasts than the RBNZ. The downside risks to inflation have been growing consistently. We have been warning of the growing risk that the RBNZ will have to cut further in 2016," he said.

"It’s important to note, low inflation is a global problem. The RBNZ’s dilemma is not unique – everywhere central banks have been forced to cut rates to unprecedented levels. And to be stingy with rate cuts when inflation is still barely positive is a risky strategy. We don’t think the RBNZ will tolerate that risk and hence we now believe a 2% cash rate is now the most likely outcome."

Tuffley said the ASB economists had a "different view of the world" to the RBNZ – and in particular forecasts of inflation.

"We expect the unemployment to rise over the next 18 months. This will keep wage inflation, and in turn, domestic inflation pressures subdued. But most importantly, we do not expect the fall in the NZD to be as inflationary as the RBNZ expects. We expect some pick up in inflation, but it will be much more limited than the RBNZ expects and it will only be transitory."

In explaining why a rate cut in the December MPS was now a done deal, Tuffley said the RBNZ had already factored in one further cut. The ongoing strength in the NZD and the recent weakness in dairy prices were "likely to be sufficient to convince the RBNZ to watch and wait no longer".

"Furthermore, the December MPS is a good opportunity for the RBNZ to foreshadow the risk of further cuts next year," he said.

"We see the RBNZ as reluctant cutters, which is why we do not expect the 2016 cuts will come for another 6 months. The RBNZ will want to watch and wait, to assess the impact of this year’s rate cuts. We have a strong view that the RBNZ will likely be disappointed with what they see.

"The OCR will eventually return to neutral (which we view as currently around 3.5%) and we see that process commencing from mid-2018. This coincides with when we see the labour market tightening once again (hence lifting domestic inflation). Global developments will also be a factor, and our expectation is that lower global investment over the next few years should lead to a reduction in excess global supply."

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

11 Comments

NZ's minimum official cash rate has to be somewhere around the 1.5-1.75% mark? We are not like the US or EU where 0% is possible.

That leaves about 4-5 cuts of 25bps available at the most, let's say 3 following a December cut which is nothing in the scheme of things.

So the RBNZ has spent almost all of its powder. The Government is trying to stop borrowing (good luck with that). All of this during a period of Christchurch rebuild spending, a massive housing bubble and record immigration. Can't see it all ending well.

Up
0

An OCR of 0.25% is possible here, but we are not in that bad a state IMHO. The problem will be no "wholesaler" will lend to use at that rate I suspect so even at

Up
0

if it gets that low expect an outflow of funds as the offshore money leaves to find a better, safer return

Up
0

Bingo. As stated above I'd be surprised if the tipping point was much below 1.5-1.75%.

Up
0

Welcome to deflation and the problems it will bring.

Up
0

Some sectors have been in this position for a while, predictable really.

Up
0

it's only a problem when you hold debt.

Up
0

Where is Grant A when you need him....

So the Q is given their ability to under-estimate just where could the OCR go to? is 1.5% for 2017 instead of 4.75% a good possibility?

Up
0

The Auckland housing is clouding the RBNZ's view. The country needs a lower OCR, it's that simple. The Auckland housing issue is a supply (too few new houses) and demand (too many migrants) problem, it should not influence the OCR.
To make my point clear, imagine theoretically, immigration at 0 and double the housing in Auckland, would that stop the price increase ? Bet your bottom $ it will, so it is a supply & demand issue.

Up
0

What will happen to the stock market if rates go as low as this article implies? Housing probably has done its dash for a while but there are plenty of large, high dividend stocks that could attract some attention.

Up
0

its santa rally time, all markets are on the up. pay to pick your stocks carefully as they will correct after it as profits get taken off the table

Up
0