Economists change their mind on next OCR movement

The RBNZ shocked the market last week by stating the next OCR move is "likely to be down", due to weak growth here and overseas. The comments have prompted leading economists to revisit their predictions.

Wholesale interest rate markets price in an August cut, according to Bloomberg. The swap rates have already caused lenders to cut mortgage rates, as the market anticipates a long-term low rate environment. 

ANZ's Sharon Zollner believes interest rates will start to fall in August, having previously predicted a fall in November. She believes the Reserve Bank's new Monetary Policy Committee will ease itself in next month, rather than making cuts straight away.

Zollner added: "We have been saying since late last year that the next move in the OCR would be down, but the RBNZ has come around to our view sooner than we had anticipated. However, acknowledging that downside risks to the growth outlook imply downside risks to the OCR is one thing; actually cutting the OCR is another. It is a line-ball call, but on balance we think the RBNZ will wait to see global and domestic risks manifest into something more concrete before actually cutting, in order to rule out the possibility of the unnecessary volatility in interest rates and exchange rates that a U-turn would engender."

Kiwibank's Jarod Kerr and Jeremy Couchman went a step further, and predict cuts in May and August. The duo said: "We had expected the RBNZ to keep the OCR unchanged deep into 2021. We’re all-too aware of the Governor’s dovish bias. And Adrian has proven himself to be a man of action. Playing the man, not the economic ball, we now expect a rate cuts, plural. We now expect a 25bp rate cut in May, followed by another cut in August – largely depending on the performance of the currency.

Westpac's Dominick Stephens does not expect an OCR change for the next three years, but said last week's developments "challenge that view". He added: "Our interpretation is that the RBNZ is leaving open the option of cutting the OCR if required, rather than signalling that a cut is imminent."

Stephens said the Reserve Bank's newfound easing bias "appears to have been driven by the actions of overseas central banks".  He said the Reserve Bank of Australia could influence RBNZ, with an August rate cut expected in Australia. "Perhaps the biggest influence on the RBNZ’s actions will be what other central banks do, and how the exchange rate responds." He added: "We expect the Reserve Bank of Australia to reduce its cash rate in August and November this year, which could well influence the RBNZ."

On Tuesday, economists at ASB also changed their minds, following weaker than expected business confidence data. ASB Senior Economist Jane Turner echoed predictions from Kiwibank, and says the OCR will be cut in May and August.