Kiwibank economists are now predicting a 'terminal' Official Cash Rate by next year of 0.75%, but also put some possibility on the rate going to 0.5%

Kiwibank economists are now predicting a 'terminal' Official Cash Rate by next year of 0.75%, but also put some possibility on the rate going to 0.5%

Kiwibank economists are now predicting the Official Cash Rate will go as low as 0.75% by next year, with some possibility it will need to go even lower.

The Reserve Bank is widely expected to cut the OCR on Wednesday from the current 1.5% to a new record low of 1.25%. 

Most economists from the major banks are now anticipating that there will be a follow-up cut later in the year, taking the rate down to 1%.

Increasingly there has been chatter that the OCR may need to be dropped even further and go below 1% - but the Kiwibank economists are the first major bank economists to come out and give a hard forecast of this.

In their weekly First View newsletter Kiwibank chief economist Jarrod Kerr and senior economist Jeremy Couchman say they now put a move to 1% as an 80-90% certainty, in November.

"And we put a move to 75bps as a 60-70% probability, in early 2020.

"The probability of a move to 50bps is not insignificant at 20-30%."

The need to go below 1% is driven by global uncertainties, with peers like the Reserve Bank of Australia likely to cut to 50bps, and a softening domestic economy, Kerr and Couchman say. 

They say, however, that in terms of a possible 0.5% OCR there are other options, such as types of quantitative easing that the RBNZ may prefer to look at first.

"Currency intervention and forward guidance ("lower for longer") are the first-choice tools."

In terms of what the RBNZ may say on Wednesday when it reviews the OCR, Kerr and Couchman expect the RBNZ to emphasise domestic developments.

"We've faced global uncertainties for years. And the US-China tit for tat trade tariff tiff continues. But domestically, the forward indicators of growth have weakened. The cost pressure firms complain of, is not being passed on. That's a sign of weakness. Business confidence remains in the doldrums and is impacting growth.

"What we need is a significant lift in fiscal stimulus. What we're getting is a significant cut in monetary policy." 

The RBNZ's expected cut itself on Wednesday won't get much attention in markets, as it's seen as a foregone conclusion (100% priced), Kerr and Couchman say.

"No cut, or a failure to deliver sufficiently dovish commentary would see a jump higher is interest rates and a spike higher in the Kiwi dollar. The Fed cut last week and saw a jump higher in short-end rates and the USD. Their commentary simply didn't match heightened market expectations.

"The RBNZ's commentary, and OCR track will garner the interest of all Kiwi market traders.

"And the OCR track must be lowered, as they would have likely cut to 1.25% - effectively a year ahead of their OCR track printed in May. We expect to see the OCR track lowered to 1.1% - showing a 60% probability of a move to 1% . That's basically what they gave us in May on the (55%) likelihood of a move to 1.25%.

"If the RBNZ cut the OCR track to 1.1%, that will not appease market traders, however. Because, the market has a terminal rate of 86bps priced, just 11bps above our expected 75bps.

"It will take a very dovish statement to get lower wholesale rates this week. Regardless of the reaction this week, we deem market pricing of 86bps to be fair, for now. A grind down to 75bps is likely. The Kiwi dollar should continue its volatile descent to 63c this year."

In terms of the impact of lower rates, Kerr and Couchman say they are worried  about the potential restriction in lending growth as the banks prepare to load more capital in response to RBNZ proposals.

"A likely outcome is a segregation in pricing and availability of credit to households and businesses. One of the major banks has already singled out lending to indebted agriculture. Maybe we see more differentiation in pricing across industries, and mortgage rates to new home buyers (lower rates), investors (higher rates) and high LVR (much higher rates).

"The RBNZ can offset any increase in lending rates, with a lower cash rate. But the RBNZ may have to get creative to offset any rationing in credit. Another, often overlooked, concern is the significant impact on savers (retirees). Term deposit rates are 1.25-to-1.75% lower in Australia. The RBA's cash rate is 1%, versus the RBNZ's of 1.25% this week."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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we could see QE this time around, not much room left with interest rates

Oh great. A recession is supposed to correct the imbalances in the economy, not cement and further inflate certain asset classes. You think they'd learn.

the guys running the policy are balls deep in certain asset classes.

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Only winner - the banks. Is anyone surprised?

and people with mortgages

Only if our beloved banks decide to pass it on, wasnt it about 50% of the last .25%. Pretty sure, based on their profits, that margin retention and their shareholders (and their fat bonuses) are higher on the agenda than mortgage holders.

I have a mortgage-free property and a bunch of mortgage-free REITs. Not bad at all.

The bankers in the US led by JP Morgan created the Fed, making the Fed forever beholden to the private banks.
And this MO seems to have spread to all the developed economies. The game will be always rigged in favour of the Banks. The House always wins (pun not intended).

Could be moot point if one is inclined to follow the money:

World's Biggest Banks Sink to Record Lows as China Pain Spreads

Moreover, US bank balance sheet growth has been less than stellar since 2007, but debt funded stock buybacks have supported market valuations. Graphic B/S evidence at the end of this article

Audaxes, do you have access to CDS spreads on the Chinese banks ? Be interesting to see if these are blowing out too.

No I don't.

i wonder why???

according to many, DEBT cant be a bad thing!!!

I don't understand why home owners should get a lower rate than investors if all other things (e.g. LVR, DTI and cash flow) are equal.

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Because that's the kiwi way. Really, everyone should stop working normal jobs and just start flipping houses. The prices always go up anyway, it's a perpetual motion device! Infinite money for everyone!

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Maybe investors could be forced to take out business loans, because they're businesses right?

That's the way it went in the UK. Buy to let mortgages are quite a bit more expensive than home loans.

Westpac tried that on with me but I told them to get real... and they did. There is no difference as far as I can see, if anything home occupied are more of a risk as they don't generate a 2nd income stream (rent). Any bank who tries to impose higher rates on investors will soon lose a substantial market share of the lending. That's why none of the big ones really impose a premium on investors, only the Co-op bank is showing an owner occupied rate (0.5% lower than their standard). I doubt they get much investor business (or any for that matter - their local branch to me just closed).

I think the justification in the UK is that buy-to-let mortgages were more likely to default - people are normally very keen not to lose the house they are living in. There is also likely to be better maintenance in an owner-occupied house so they are more likely to preserve their value.

Thanks for the reply. I would think an investor who uses their personal home as collateral for borrowing (which is fairly standard practice) would alleviate these concerns.

Speculation on this matter is unhelpful and generally something central banks try to avoid. The answer to your question HeavyG is incredibly simple. In every housing market, in the history of housing markets across time and space, it is investors who default and offload non-performing property investments first. WAAAAAAAAAAAAAAAAAAAAAY before home owner/occupiers.

It's not unfair, it's not a value judgement, it's a fact shown in every analysis ever done. That is not to say that it is EVERY investor that offloads and defaults, but that they do so and considerably higher rates than home owners in an economic downturn.

Well the big four must be unaware of this "fact" as they are not charging a premium to investors. You may need to offer your services as a consultant and explain why their pricing of investor loans is WAAAAAAAAAAAAAAAAAAAAY wrong.

Oh Jesus wept. It's not even complicated. Banks make lots of money from investors in good times, risk is good during the good times, it's only during perceived bad times that banks change policy against risk. It's economics 101, not even news, not even complicated.

That would change the game a bit, I get tucked to the tune of 9.7% on my business OD currently, plus .1% per month "management fee".

Might be worth having another talk to your bank, you don't ask, you don't get

But residential property investors are doing God's work, don't you know.
Surely as such they should command favourable lending conditions to compliment their righteous views.

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But residential property investors are doing God's work, don't you know.

That's why they double every 7-10 years. It's bbiblical prophecy.

The church of the great prophet known as Ashley.

Could the RBNZ surprise the market and cut by 0.5% this week?

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Could Yvil surprise the market by posting the same comment on a third article?

Pundits are picking Yes.

Ha-ha-ha:)

think he will, based on your prediction.

Next thing you know pensioners will need to think about downsizing to free up some more equity to live off. That'll be tough in an Auckland market with no shortage of listings, very high days to sell, and declining prices.

Or reverse mortgage, thus eating the capital that might have been passed by inheritance to the next generation to buy still expensive houses. Wonder how all this works out in the long term... Might have to buy more shares in a bank that writes such mortgages - gotta be doing well for the next few years....

The need to go below 1% is driven by global uncertainties, with peers like the Reserve Bank of Australia likely to cut to 50bps, and a softening domestic economy, Kerr and Couchman say.

So, central bank monetary policy is a matter of following interest rates down whether it be the neighbour or Germany. Our future can be viewed here and capitalised here if one has the means.

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Need to go lower "Driven by global uncertainties."
Do you not just love the management speak /Newspeak of these people
As Robert Redford said in 3 days of the Condor: "where do they get you people?'
Translation: a FIRE economy is driven by acceleration in leverage based on speculative finance driven by more indebtedness. When acceleration slows, the edifice of confidence and toxic debt wobbles requiring more to be added at lower rates. What do they do when it hits zero? Charge you for having money in bank and freeze accounts when banks go down.
if NZ economy and Australia economy are doing so well, why do we need more cuts? because people ain't borrowing enough to buy houses. Why? Because they cannot afford them.

So what your saying is that New Zealand has about 1.2 trillion reasons why I should not hit the fan .

Banks are not gaining, by the way, they are just attempting to shore up equity about to be swept away by defaults... In EU banks hate Draghi and ECB for his policy of LTRO which was meant to save hem but merely zombified ones that should have been let go and means rest make b all profit. Hence Stoxx 600 at levels of 16 years ago.

Bank "equity about to be swept away by defaults..."
Ludicrous posting ... based on hot air. Defaults are lower than 10 years ago

They should make a big statement this Wednesday (a 0.5% drop at least). These 0.25% drops with promises of more to come are not really going to have much impact. I would say they delay investment (why borrow now when it will be cheaper later)

None of this is about global uncertainties. There is a problem with mortgage payment defaults. The problem will keep increasing unless interest rates are lower. Sure it would be nice if more money was created and injected into the economy, but when people are already at the limit borrowing more is not a good idea.

Separately there appears to be a liquidity crisis but that is more about banks actually obeying the regulations.

If we get desperate we could provide NINJA loans.

If rates go to zero, which seems increasingly likely, as the housing market has only just started to turn down and rates are already very low, they’ll be concerned about people taking their deposits out of the banks. Wouldn’t surprise me if there are steps taken to limit cash withdrawals and big paper cash transactions. No surprise the price of gold has been climbing.

Australia is already changing laws to deal with ZIRP and adding more flexibility for bail in of their banks. By the way everyone is reacting to the slowing global economy you'd think our entire global monetary system is a ponzi scheme.

.... and you'd be right :) You might want to make mention of that next time you're speaking to your friendly but clueless banking representative.

There is hardly enough bank vault cash to payout the better informed top end of town depositors. The most recent count stands at $603 million down from a recent April peak of $888 million. Current collective bank deposits are recorded at ~$350,000 million. View data

VoR, I think we already have a premium on time deposit rates ~ if you have a look at bank bond yields vs the equivalent term deposit the TDs are quite a bit higher.

I'm guessing that to prevent any decline in TD volumes we will won't see much of the OCR cuts passed through to the variable borrowing rate and nor will we see further declines in the 2-5 year swaps rates being passed on to mortgage customers.

To allow for that TD premium I can't see mortgage rates coming off more than 50bps from where they are now irrespective of the depth of OCR cuts/yield curve flattening.

Well, seeing the Trade war is just now kicking off anything is possible...

Anybody still rejecting the notion that NZ banks might be wise to keep more cash on their books in this falling income scenario?

We are going to be in for some real turmoil. The fact that the Fed lowered interest rates in the face of a growing US economy says it all. They are now the global CB and the contagion that will come from anywhere (e.g. Europe) can topple economies all over the world. The RBNZ will lower aggressively in the vain hope that this contagion will be mitigated, but the irony is that they are a key part of the problem (the other being govt) and their actions will lead to a collapse in confidence. And it is confidence, more than the quantity of money, that will trigger the next inflationary crisis. We could then see a surge in cost-push inflation (not demand driven) that will have to lead to higher interest rates, and then, well that isn't likely to be fun...

Rates going up:
Rising rates will burst the bubble, this property crash is going to be huge, 25-50% crash!
Rates going down:
The ponzi is even larger than I thought, prices back to 2002, 50-75% crash!