Economists at country's biggest bank do u-turn; now see Official Cash Rate hitting 2%

Economists at country's biggest bank do u-turn; now see Official Cash Rate hitting 2%

By David Hargreaves

Economists at the country's biggest bank ANZ have done a big u-turn and are now forecasting two cuts to the Official Cash Rate this year, which would take it down to an all-time low 2%.

The forecast, contained in ANZ's weekly Market Focus comes less than two weeks after ANZ chief economist Cameron Bagrie spoke out strongly against the Reserve Bank making any cuts. He said on February 17: "Cutting the OCR in the face of greater leveraging behaviour (credit growth in excess of GDP – we have that), solid consumption growth (booming in H2 2015), and double digit house price growth is the recipe for an accident."

But now, however, the ANZ economists say further reductions in the OCR are "more likely than not" - and don't rule out the possibility of the first cut coming as soon as April, though they have "pencilled in cuts for June and September".

And in ASB's Economic Weekly, senior economist Jane Turner said ASB had previously called for cuts in June and August, but given anti-anflationary developments this month "we now view the April OCR Review as live". 

"Next week’s RBNZ Monetary Policy Statement is likely to be too soon for a sea change in the RBNZ’s view.  However, we will look to the Statement for clear hints to how far the RBNZ goes in softening its stance," Turner said.

Three of the big four banks are now tipping interest rate cuts this year, with ANZ joining Westpac (first of the big banks to predict cuts) and ASB.

The move by the ANZ to reverse its earlier view will add further pressure to the RBNZ ahead of its next call on interest rates on Thursday, March 10.

RBNZ Governor Graeme Wheeler has cast himself in the role of a reluctant cutter, having earlier this month given a defiant speech, saying he would not “mechanistically” make cuts to increase the inflation rate.

The ANZ economists said while there were several contributing factors (stubbornly high NZD, lower inflation expectations, receding export prices, dairy payout prospects) three themes have been "enough to tip us into the rate cut camp".

These themes were:

  1. a moderation in economic momentum now looks to be around the corner at a time when inflation is already low;
  2. global unease – China has problems and they will be exported; and
  3. structural shift in funding costs, which, if not compensated for by monetary policy, will accentuate decelerating economic momentum.

"We are still constructive on the outlook for the economy but part of this is contingent on a relaxation of financial conditions via the NZD and monetary policy," the ANZ economists said.

The economists said while they were picking June and September cuts, if the RBNZ’s 'core inflation measure' was to stabilise in the first quarter of this year (after rising to 1.6%), then an April (rather than June) cut would "be odds on".

"There will be no point waiting until June. Technically we place an equal probability on either an April or June cut at present. Our Monthly Inflation Gauge will help shape our view on the risk profile surrounding the Q1 CPI."

The economists said that up until now, there have been material offsets to the "drags on inflation and activity", which were enough to keep them in the no-change camp.

"The economy has been performing well, as has the labour market. Capacity constraints are apparent in some sectors; capacity utilisation is high. Core inflation – according to the RBNZ’s preferred measure – has been rising. Outside of dairying, exporters are faring okay. Tourism is booming. The tone of the (lagging) domestic data, as well as anecdotes on the ground, remains consistent with a domestic economy that has reasonable momentum right here and now. Households are showing re-leveraging behaviour off an already leveraged balance sheet. Regional house prices are rising strongly. Such forces are strong considerations still."

But the economists said a number of factors had collective become too difficult to ignore and had "tipped us over the edge".

"Financial conditions have tightened a lot, and rapidly. House prices, credit spreads and the NZD are all contributing. It is now looking like 2% GDP growth (i.e. below trend) could again be on offer (and that’s assuming no further tightening). The speed of the tightening has been particularly notable. The last time we saw a tightening this rapid over six months, the Asian crisis was unfolding. The GFC tightening was more aggressive overall, but not as rapid in the first instance.

"Leading indicators are set to moderate further. There is a strong relationship between financial conditions as captured by our Financial Conditions Index (FCI) and GDP growth, but also between the FCI and lead indicators such as our own confidence composite measure. We’ve already seen a gentle rolling in business confidence within our Business Outlook today, although levels remain respectable. We never want to be in the game of forecasting confidence, but in this environment more 'rolling' looks on offer.

"As such, we have less faith in the domestic economic story heading into the back half of the year. Growth looks set to fall below trend. And importantly, the RBNZ needs growth to be at least at trend to drive medium-term inflation pressures higher. We doubt we will see it. To emphasise, we are not talking a downturn, just a more moderate rate of growth, closer to 2% than 3%."

The economists said a growth backdrop that is "even only modestly below trend" is a problem for a central bank when inflation is already extremely low and inflation expectations are receding.

"The RBNZ needs to be alert to signs of moderation in growth to below-trend rates. We think that is coming. And with that, a lower OCR becomes more likely than not."

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Credit growth at ANZ must be slowing. Hence a meeting between the big wigs and their economists to order a wheel-out of the appropriate rhetoric.


Credit growth at ANZ must be slowing

At a global level there is no evidence to suggest lower short term official interest rates do anything other than affect a wealth redistribution transfer to the least in need of such social intent. Higher asset values seem not to translate into benefit for the national wealth production sectors. Higher wage payments to secure workers in Auckland hardly qualifies.

Rubbish, plenty of sound economics if you want to look, but then this wouldnt suit your political views would it.

That guy has no clue. He's advocating exactly what Steve Keen has been saying all along - That is when the banking sector stops creating money the government sector will have to take up the baton. The difference is Krugman has no realistic predictive models to back up his theory.

He just explained the theory right on that page with specificity.

or maybe you missed "This is why Keynes declared that “The boom, not the slump, is the right time for austerity.” sometime before Steve keen was born. Though I would think SK would be in agreement, got a link?


here is it seems SK agreeing with PK,

Sound economics - must be the greatest oxymoron of our times :-).

Suggesting that disapproval of the prevailing economic orthodoxy is a political view is (to my mind) a strawman-type argument.

so back it up with some comments from real economists like I have above.

--edit-- PS Steve Keen and PK are definitely criticising the central bankers and govns as doing the wrong thing or not enough, but they back it up with reasoning and evidence.

Of course both CBs and main Govns are not "orthodox" economists but but lean
to the right and have caused quite a bit of damage in the process. Sometimes due to their actions,
sometimes inactions and sometimes insufficient actions. I mean austerity was a big mistake,
that can be clearly seen, raising the OCR has been a mistake in every country that has done it since 2008.

Stephen seems to hold a view more similar to doing even more of the above it seems ie he wants a
higher OCR? / interest rate yet the evidence of this being bad is overwelming I would suggest.
What other conclusion is there to hold then?

I've no idea about right/left - salt/fresh - Keynesian/Austrian .. it's all historical tripe to my mind - pseudo-science. Welcome to the perils of prediction. I prefer Marx, an historian. And I think he got it pretty right when he said, "The history of all hitherto existing society is the history of class struggles".

I think the few sane folks left out there simply want to see the return of appropriately risk weighted returns.

So here's my Marxian analysis of the present economic situation :-): The casino is rigged and when one new gambling method runs out of steam, another is dreamed up along with a shiny new acronym for the high rollers to manipulate and play with. And neither you, nor the guys you are following for guidance have any hope in hell of predicting what's next for society - but we should sit up and note the anarchy that is the human condition in many countries/regions in the present day. That is the reality of the failed "economics" of decades past.

Instead, you and I and the guys and gals delivering the drinks and wiping the floors clean get sold nothing but false hope under a veil of promises from the casino masters.

Sound economics. I think not. Read more

So the writer sings from the same austrian hymn book as yourself, "Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. " Of course denial that the economy can be modelled would seem to be classic mises/austrian. Yet in the real world the models seem to be good enough at predicting the fall overs eg Steven Keen's minsky.

Otherwise you seem to suggest that its gutt feeling? or what exactly? "he looked at me funny"

I'd go with the likes of Steven Keen as they have the best track record of being right. though show me a better track record and I'll seriously look at following that.

I was reading Hyman Minsky's works when I was a bond professional at a bank in London during the nineties - Steve Keen had at that point not made a name for himself.

and so? These days instead you read and regurgitate from pretty much the same "hard core" investment advisors opinion pieces to justify your viewpoint, just how is this a sound way to run a Govn/ national economy?

No - I quote Snider because he sees the world, particularly when it comes to Eurodollars, in exactly the same manner as it transpired in real banking life for me. No theories, if and buts - just the real thing as it unfolded.

Fair enough, there are 2 sides to the deal / contract as always and we are both young enough to see it unfold in front of us. Of course I see the bankers and financial types as much of the cause of much of the problem where it seems they do not.


You keep writing stuff like this,but what would you do?I accept that low interest rates benefits those with assets and can create bubble conditions,but productive businesses also benefit.They can borrow more cheaply and/or retire older more expensive debt.It also assists in lowering the currency and this significantly benefits companies such F&P Healthcare.
The property problem can and should be addressed through measures such as;extending the 2 year gains Tax to say 5 years on investment property,requiring banks to severely limit loans on investment properties,requiring overseas buyers to purchase new builds,taxing developers' land banks after a specified period and so on.The banks could be required to hold more capital against all property related deals.
I think that in a time of structurally low inflation,low interest rates are an inevitable corollary.,though I certainly accept that the lower they go,the less effect they seem to have.Several countries,as you will be well aware,now have negative rates.

They can borrow more cheaply and/or retire older more expensive debt.It also assists in lowering the currency and this significantly benefits companies such F&P Healthcare.

You may wish to revisit the mechanics of this claim.

As interest rates fall outstanding bond prices rise above the issuance price. Retiring this type of debt demands more borrowing than was raised in the initial funding operation. This limits the funding of core operations and gives newer competitors, able to borrow less at the lower rate, a competitive pricing advantage. Read more and more

So they are only some 6? months behind a few of us....

In what capacity, other than a biased debtor?

No bias, looking forward at the fundamentals for why sustained real growth and inflation isnt possible. ie peak oil, overload debt, crippled main street with no wage increased so no demand, and a govn hell bent on doing nothing while listening to the same economic hymn song as you.

PS my mortgage is tiny, so how about some sounds economics from you instead.

Yep ... and Bill English said on Friday " There is room to cut rates " so we can assume he would never make such a statement without speaking to Wheeler .

Truth is , we need a weaker currency for the dairy sector ( and other export receipts such as timber , tourism and gas ).

Whether this sabre rattling weakens the currency or not remains to be seen .

In any event cheaper money is not good for the Auckland housing bubble

Mis-direction, what there is room for is Govn spending on infrastructure we need like schools being rebuilt while the Govn can borrow for peanuts. This could be is way more influential than a 50~100 basis point cut.

"In any event cheaper money is not good for the Auckland housing bubble"

and yet the immediate effect of a decreased OCR will be for banks to decrease their residential home mortgage rates which are already at a 50 year low in NZ.

And a weaker currency will make NZ residential property more attractive to overseas buyers.

There is little to prove that banks will provide their lower cost funds to truly productive NZ activities and much to prove they will take the opportunity to get NZ depositors to take further decreases in their deposit interest rates - effective immediately. In first instance all this supports the property market - rather than provides any incentive to save.

"And a weaker currency will make NZ residential property more attractive" - not for those that bought property at 90 cents to the dollar - they will have lost plenty even after the massive house price increases. If the NZD is trending down, NZ property looks pretty risky to an overseas investor.

And a weaker currency will make NZ residential property more attractive to overseas buyers.

Weren't the Japanese expecting same when the BoJ went full NIRP

It is important to note that that sovereign debt prices have more input than short term interest rate differentials when it comes to pricing the value of respective currency pairs. Read more

Evidence is growing that Asian Investors are stuck with high end London property with no buyers in sight.

I'm sure the governor will make up another measure of inflation that magically comes out at 2%.

But wait ! Roger Kerr warns today that (I quote) "Inflation IS coming"

Inflation is coming; it just might take another 15 years to arrive. With junk bond default rates back at 2008 levels there's yet another bubble primed to burst.

It turns out that lending money to broken companies, institutions and governments for the purpose of paying interest on their existing debt is a bad idea. Best to decrease interest rates to prevent an unsustainable and unrecoverable position from collapsing.

oh god not again....

heres a radical view:

Lower the OCR to 0.00% with immediate effect.
Make 30% minimum deposit for a house nationwide.
Make investors pay 50% minimum deposit for a house nationwide.
Implement a capital gains tax.

That will kill the NZ Dollar, bring the housing market back to levels which dont cause financial instability and give exporters a huge boost.