ASB predicts mild OCR cycle

ASB's quarterly outlook for the New Zealand economic predicts "sunny skies ahead", with low rates until the second half of 2020 and a peak of just 2.75% in the next OCR cycle.

The lender predicts that when rates do eventually go up, New Zealand will experience a "mild" tightening cycle, peaking at just 2.75% from late 2021. The predictions, off the back of more bullish Reserve Bank language and strong economic data, are likely to be welcomed by Kiwi homeowners and investors fearing a rapid OCR increase.

ASB's has pushed back its prediction for an OCR increase by six months. It believes rates will begin to rise in August 2020.

Nick Tuffley, Chief Economist at ASB, said: "This reflects our judgement that the growth and medium-term inflation outlook will not be strong enough to clear the high hurdle necessary to trigger an OCR hike.

"The team expects a very mild RBNZ tightening cycle peaking at just 2.75% from late 2021. “This is because the RBNZ will be mindful of not getting policy settings too far out of sync with other central banks,” Tuffley added.

For the near term, ASB warned rising costs could be passed on to Kiwi consumers,slowing economic growth. Tuffley added: "Rising costs for necessitates (fuel, rent and food) are putting the squeeze on households, particularly those with less disposable income and tighter budgets. Areas of the economy that are exposed to discretionary spending are likely to be vulnerable in the short term.”

He added: “If firms find demand is not strong enough to absorb higher prices, economic growth and core inflation could slow over the next six months.”

The bullish medium term outlook comes as a host of banks moved to slash their interest rates to record lows last weeks. Major lenders including BNZ and ANZ slashed one year fixed rates to below 4%, levels barely experienced in the post-war era.




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