ANZ chief economist Sharon Zollner says the bank's economists are now predicting the Official Cash Rate (OCR) to be at just 0.25% by next May because, with the growth and inflation outlook continuing to deteriorate, "it’s not an exaggeration to say that it is pretty much one-way traffic out there."
Zollner says she expects the Reserve Bank to cut the OCR, which was reduced by 50 basis points to just 1% on August 7, by another 25 basis points in each of November, February and May. Until today (Friday), ANZ's economists have been picking just one more OCR cut in this cycle, with a 25 basis points cut in November to 0.75%.
"We would not rule out another cut as soon as September, but it is not our central view. The forecast 25 basis points May cut is a placeholder for the impact of the RBNZ’s bank capital proposals, the details of which are as yet unknown. Global and domestic economic signals continue to deteriorate," Zollner says.
She says there are seven reasons why ANZ's economists think the RBNZ will conclude "it’s pedal to the metal time," with New Zealand "experiencing a growth stall."
The seven reasons Zollner cites are:
1. Near-term domestic growth indicators are deteriorating.
2. Inflation expectations are slipping.
3) ANZ's Australian economists now expect the Reserve Bank of Australia to cut the cash rate in October, February and May, taking it to 0.25%.
4. The global environment continues to deteriorate.
5. The labour market outlook is deteriorating.
6. The RBNZ proposes to lift bank capital requirements significantly.
7. The outlook for the dairy sector is troubling.
'Right at the limit of where we estimate conventional monetary policy effectiveness ends'
Should the OCR be cut as low as 0.25%, Zollner suggests this is right at the limit of where conventional monetary policy is effective. The Reserve Bank last year detailed five options available to it should future economic conditions require the OCR be cut to zero. Meanwhile Zollner says things are largely just heading one way.
"It’s not an exaggeration to say that it is pretty much one-way traffic out there. The only easily identifiable upward risk at present is that the housing market could take off again in response to the record-low mortgage, and term deposit, rates. However, the RBNZ is responsible for financial stability as well, and what the low OCR giveth, the LVR [loan-to-value ratio] restrictions taketh away. And any housing flurry might also get rudely interrupted if the labour market tightness dissipates as rapidly as the indicators are suggesting it might," says Zollner.
"New Zealand is experiencing a growth stall. It is important to note that as things stand here and now, there is no fundamental reason for the economy to go into recession, and the Reserve Bank is doing everything it can to make sure it doesn’t."
"But given the deteriorating global environment, and the context of the current downward trajectory in the domestic data, the prospect of the economy accelerating to above-trend growth – which is what the RBNZ needs to be able to credibly forecast in order to forecast delivering on its inflation target over the medium term – looks a long way off. Too far off," Zollner adds.
"The RBNZ will conclude it can’t afford to wait and see. Each successive cut from here is likely to be less stimulatory than the last, but they’ll throw what they’ve got at it. Our new forecast endpoint for the OCR is right at the limit of where we estimate conventional monetary policy effectiveness ends. Down the track, there’s scope to get creative with unconventional policy, though we stress that the pros and cons would have to be very carefully weighed, with the global track record hardly a ringing endorsement. But conventional OCR cuts are a logical start."