Reserve Bank unlikely to hike Official Cash Rate until 2014, may cut, NZIER says; Cites stagnant growth, low credit demand, global risks

By Alex Tarrant

A stagnant economy, low credit demand, global economic risks and weak price pressures mean the Reserve Bank is likely to keep the Official Cash Rate on hold until 2014, the New Zealand Institute of Economic Research says.

The central bank may even have to cut the OCR if the global situation worsens, NZIER principal economist Shamubeel Eaqub said. His 2014 pick for the first OCR hike has been pushed out from mid-2013.

His stance is out from New Zealand bank economists, who are picking the Reserve Bank will resume rate hikes from the start of 2013. Markets, on the other hand, are pricing in at least a 25 basis point cut in the OCR from its current record low of 2.5% by the end of the year (pricing is for 44 bps worth of cuts).

“The economy is stagnant. There is little economic growth and the outlook is challenging. Low interest rates are not encouraging new borrowing and investing, as we pay down debt or deleverage. Periods of deleveraging typically last seven years; we still have the second half of the adjustment to traverse," Eaqub said when releasing NZIER's latest Quarterly Predictions.

“We expect only 1.5% growth in 2012, recovering to 2.5% in 2013. The rebuild in Canterbury will ramp up gradually from mid-2012 through to 2013. We are less optimistic than most on the timing of the rebuild, as we think persistent aftershocks, tougher building codes and insurance issues will slow Canterbury’s recovery," Eaqub said.

Global risks casting a shadow over growth prospects

In addition to the continued sovereign debt crisis in Europe, slowing Australian and Chinese economic growth were the two key external risks facing New Zealand. The slowdown in Asia-Pacific growth would be a drag on the demand for New Zealand’s goods exports and tourism.

"Growing global risks, falling commodity prices and slowing exports means it will be a tough year ahead. The RBNZ will hold interest rates steady until early 2014. They may cut interest rates if the European debt crisis worsens," Eaqub said.

Dreary sameness for households

"For households the economic picture will remain drearily similar. There will be few new jobs and minimal real wage growth. Households will take advantage of exceptionally low mortgage rates to pay down debt, but this will restrain consumer spending," he said.

"Because consumer demand is anaemic, firms have little scope to increase prices. Growth in sales must be from greater market share, possibly through acquiring struggling competitors. Expansion strategies will require patience and deep pockets to ride out the remainder of the great recession."

(Updates market OCR pricing)