NZIER bucks trend of major bank economists, saying the RBNZ has no choice but to keep the OCR stable for another two years

The New Zealand Institute of Economic Research (NZIER) is bucking the trend among major bank economists, who are calling for cuts as soon as next month, predicting the Reserve Bank (RBNZ) won’t shift the Official Cash Rate (OCR) until mid-2017.

In its June Quarterly Predictions, NZIER says the RBNZ is in a bind. It can’t cut the OCR to counter deflationary pressures, as this would see Auckland’s housing market spin further out of control.

While the economists at the major banks also recognise the RBNZ is between a rock and a hard place, they’ve indicated they expect RBNZ Governor Graeme Wheeler to cut rates sooner. The RBNZ next reviews the OCR on June 11.

The OCR has remained unchanged at 3.50%, for the last six reviews, before which there were four increases in a row between March and July last year.

The NZIER says, “There is almost no general inflation pressure in the New Zealand economy. Imported deflation and price-sensitive consumers are maintaining a lid on prices. We expect inflation to stay below the middle of the Reserve Bank’s target band (between 1 and 3 percent on average over the medium-term) well into 2017.

“Ordinarily this, and the uncertain global situation, would warrant an interest rate cut, but the RBNZ can’t afford to throw any more fuel on the Auckland housing market fire.”

NZIER has changed its tune from when it released its September 2014 Quarterly Predictions publication. Then it said New Zealand's economic recovery had passed its peak and the RBNZ should delay any further interest rate hikes until 2016.

NZ economy solid - but not solid enough for us to get comfortable 

Looking at the economy more broadly, the NZIER says we’re sitting pretty, but need to be wary of the storm clouds ahead.

“Strong net migration, a booming Auckland and the Canterbury rebuild are boosting New Zealand’s economy. Growth is expected to remain solid at around 3% per year out to 2017.

“This is a healthy outlook, especially compared to many other economies around the world that are struggling to pick up after the global financial crisis.

“This robust growth will flow into around 130,000 additional jobs over the next two years, with the unemployment rate dropping to 5.2% by early 2017.

“Wage growth will be somewhat muted however at around 2.5%, primarily due to weak inflation pressures and an expanded labour force from strong net migration.”   

However, the NZIER says there are a number of hurdles the economy’s yet to jump over.

“The dairy price drop has left a $6 billion hole in rural incomes. The Auckland housing market still looks very bubbly and vulnerable to a sharp correction.

“Recently announced policy changes by the Reserve Bank and Government should only dampen housing demand at the margin.

“The Canterbury rebuild is close to its peak and its growth impetus will start to fade. And the global economic outlook is far from certain, with China and Australia both softening.”