Next OCR cut to be the last - ANZ

Until recently, ANZ was expecting two further 25 basis point cuts to the OCR – in November and then early in 2017.

But ANZ chief economist Cameron Bagrie said the bank has now removed the second OCR cut they had pencilled in to their forecasts for early 2017.

There are still reasons – like a global event, ongoing weak tradable inflation through NZD strength, or failure of inflation expectations to lift - for why the Reserve Bank could get dragged back to the easing table, he said.

“But when balanced against strong domestic growth, emerging capacity strains, rising domestic inflation pressures and some signs of a turn in the global inflation cycle, additional OCR cuts have become harder to justify as a central scenario.”

Bagrie said the case for easing is looking more tenuous by the day – with data due this week likely to show a large deficit on weaker primary exports and further cooling in new mortgage lending.

“Absent a global event (which is still a clear risk), we now struggle to see why the OCR should be headed any lower after the Reserve Bank delivers its ‘well flagged’ cut in November.”

For this reason, ANZ now expects to see the OCR stabilising at 1.75%.

While ANZ does expect activity growth to moderate in 2017, it’s not the sort of moderation to which the Reserve Bank should respond, Bagrie said.

Rather it will be driven by capacity constraints which should lead to a required slowdown in credit growth and this rationing will, in turn, dampen growth.

“However, given the momentum in the economy currently and its desirability in a medium-term context, it is not the kind of ‘slowdown’ that monetary policy needs to concern itself about offsetting.”

ANZ may have changed its OCR forecast but, to date, other banks have not.

Westpac acting chief economist Michael Gordon said annual CPI inflation should rise gradually from here, but it will be a slow return to the Reserve Bank’s 2% target midpoint.

This means that the Reserve Bank has more or less committed itself to a further OCR cut, most likely in November, he said.

“Beyond that, the case for additional easing in 2017 looks less compelling, especially compared to a few months ago, given the range of data pointing to the continuation of solid growth.

“But a lot can change between now and next year, and the Reserve Bank will want to keep their options open.”

ASB senior economist Jane Turner said they expect the Reserve Bank to cut the OCR by 25 basis points in November and they are putting 50% probability on a further cut next year.

BNZ senior economist Doug Steel said they expect the Reserve Bank to cut the OCR to 1.75% at its November meeting and maintain an easing bias.