Westpac economists are cautioning that if the Reserve Bank does cut the Official Cash rate there is a chance this could refire the housing market.
The economists say in their NZ Weekly Commentary that they are expecting now that the RBNZ will cut the OCR (from the existing 1.75%) when the rate is next reviewed on May 8.
"The big risk with cutting the OCR is the housing market," they say.
"An OCR reduction could cause mortgage rates to fall even further, increasing the risk of stoking the housing market which is already booming in many regions beyond Auckland."
The economists say that in switching to an easing bias, the RBNZ was clearly getting nervous about the global economic outlook.
"The fact that foreign central banks are moving towards more dovish monetary policy stances has been particularly important. If New Zealand fails to follow suit, the RBNZ is worried that the exchange rate could rise, putting downward pressure on inflation which is already struggling to reach the 2% mid-point of the RBNZ’s target band."
Which "option to go with" was a matter of judgement. But with nationwide house price inflation currently at 2.6% and inflation flagging, "it is now looking more reasonable to opt for a modestly lower OCR than it looked last year".
"When it cuts in May, the RBNZ will leave the door open to a follow-up cut," the economists say.
"There is a risk that they follow through on that, but more likely they will keep the OCR at 1.5% for the remainder of 2019.
"By the second half of the year the New Zealand economy will be showing clearer signs of improvement due to fiscal stimulus, lower petrol prices and strong construction activity in Auckland and sentiment about the global growth outlook should be improving.
"In addition, the sharp fall in interest rates we’ve seen in recent weeks is set to put downward pressure on mortgage rates which will be a very large stimulus for the housing market."
The economists say they don’t think a second OCR cut in 2019 will be justified.
They believe, however, that by the early 2020s the introduction of a capital gains tax, the end of the construction boom, and slowing population growth will likely see that change, justifying a lower level of the OCR.
"We have pencilled in a second cut for May 2020, which would take the OCR down to 1.25%."
The economists note that the RBNZ is becoming increasingly doubtful that New Zealand GDP growth will accelerate to the extent it is forecasting in 2019.
"Recent data has on that has been mixed. Consumer spending and construction data has been strong but last week’s Quarterly Survey of Business Opinion was weak.
"Not only did headline business confidence fall to within cooee of September’s 9-year low, but there was also a broad-based deterioration across most of the key activity and investment indicators. Profits are being squeezed by rising costs and a perceived inability to pass these on to customers, increasing the chances that weak confidence will become self-fulfilling. The survey suggests March quarter GDP growth is likely to be around 0.5%. That’s weaker than the RBNZ’s forecast of 0.8%, and is consistent with an economy that is ticking over rather than picking up."
The economists not that the May OCR decision will be the first made by the RBNZ’s newly formed Monetary Policy Committee, making this something of a “blank slate” decision.