Westpac latest to predict May OCR cut

Westpac economists are the latest to change their minds on the OCR, predicting the Reserve Bank will cut rates next month.

Up until last week, Westpac economists, including Dominick Stephens, predicted the OCR would remain at 1.75% for the next three years. But the Reserve Bank's shift to an easing bias, public concerns over global growth and trade, and "broad-based weakness" in last week's Quarterly Survey of Business Confidence have led the bank to change its views.

Furthermore, Westpac economists predict the introduction of capital gains tax, the end of the construction boom, and slowing population growth will see the OCR cut to 1.25% next year.

Westpac joins the likes of Kiwibank in predicting a May OCR cut. Next month's OCR and MPS will be the first under the central bank's new Monetary Policy Committee, which has been formed to make rate decisions. 

Westpac economists said concerns about the Kiwi Dollar could prompt the OCR cut. "In its April Statement, the RBNZ was clearly getting nervous about the global economic outlook. The fact that foreign central banks are moving towards more dovish monetary policy stances has been particularly important. If New Zealand fails to follow suit, the RBNZ is worried that the exchange rate could rise, putting downward pressure on inflation which is already struggling to reach the 2% mid-point of the RBNZ’s target band."

The economists said low inflation would convince the MPC to cut rates, but cited fears the move could end up "stoking" the property market. "Which option to go with is a matter of judgement. But with nationwide house price inflation currently at 2.6% and inflation flagging, it is now looking more reasonable to opt for a modestly lower OCR than it looked last year."

Westpac's change of heart adds to the growing consensus that rates will fall this year, as wholesale rates and long term mortgage rates continue to decline. ANZ economists, who have predicted rate cuts for the past several months, believe the OCR will start to fall in August, It previously predicted a November cut.

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