OCR cut on the cards this week

How times have changed! Last month just one economist forecast the Reserve Bank’s OCR cut.

Now - thanks to the country’s changing economic situation - economists are near uniformly predicting that the RBNZ will cut the OCR again next week.

Of the economists who responded to a mortgagerates.co.nz survey, just one said the RBNZ wouldn’t cut the OCR.

Donal Curtin, from Economics New Zealand, said the RBNZ would hold until September when it would cut the OCR to 3.%.

The other economists surveyed all said they expected the RBNZ to cut the OCR to 3.0% next week.

However, they all predicted the OCR would be cut to either 2.5% or 2.75% by the end of the year.

Infometrics Ltd’s Mieke Welvaert said low CPI inflation, falling dairy prices and weak business and consumer confidence meant there was an 100% probability of more cuts.

While most economists are predicting the OCR will trough at 2.5%, one thinks it will reach a low of 2.0%.

Westpac chief economist Dominick Stephens said he now expected the RBNZ to reduce the OCR to 2.0% by the end of the year.

“This will involve one reduction of 50bp - most likely in September, but possibly as early as next week’s OCR review.

“At the other three meetings, we would expect 25bp reductions in the OCR.”

Stephens said this was because dairy prices plunged even further at the latest GlobalDairyTrade auction, while the latest inflation figures were, once again, softer than expected.

Further, he said the Canterbury rebuild has peaked nine months earlier than previously expected and would not add materially to economic growth over the remainder of 2015 or in 2016.

There was a risk that there could be a 50bp reduction as early as July, Stephens added.

“The strong state of the housing market may be the factor which prevents that. By contrast, we would expect the faltering economy to have dented the housing market by September.”

ASB, ANZ and HSBC economists all expect further cuts to the OCR this year - but, at this stage, they all believes the cuts will stop once the OCR hits 2.5%.

HSBC chief economist Paul Bloxham still expects the New Zealand economy to perform well over 2015 but, in his view, the peak of the growth cycle is clearly past.

For the RBNZ, upside risks have now been taken off the table, he said.

“Action is needed to support the dairy sector in the short term and, in the medium term, to ensure that inflation stabilises close to 2%.”

He has called a 25bps cut next week and said he will stick to that call, although a straight 50bps cut is now a real possibility.

“We do now expect another two 25bps cuts before the end of the year, taking the cash rate back to 2.50%.”