How low could the OCR go?

Until recently a hike seemed more likely, but economists are increasingly entertaining the idea of a cut following the central bank's August MPS announcement.

Just how low could the OCR go? In its latest note to the market, the bank pondered whether one OCR cut would make a material difference to the economy, given how low rates are already.

The economists said the neutral OCR rate — a rate that is neither expansionary nor contractionary - has fallen, indicating a longer period of lower rates.

The bank said a single cut (of 25 basis points) would not be a “game changer” in the low interest rate environment. Economists, led by Sharon Zollner, said: “If the data disappoints, we would likely be looking at a 50-100bp adjustment in the OCR. But in our view, this would make a difference. To get straight to the punchline: monetary policy is still working well – but it has changed.”

ANZ said the outlook for the economy was “uncertain” but “generally more downbeat”: “At the next OCR Review we expect that the RBNZ will continue to acknowledge risks to activity, keeping open the possibility that the next move in the OCR is down, and reiterating that it is willing to do what it takes to support the economy.”

Talk of a cut has grown louder in recent weeks after Reserve Bank Governor Adrian Orr revealed his concern about the economy in August. Orr told the market to “watch, worry and wait”.

Yet the fears could be overplayed. Second quarter GDP grew by 0.8 percent, an annual increase of 2.5 percent, according to a recent survey of economists conducted by newswire Bloomberg.