Economists at the big-four lender believe the OCR will be slashed to 1.25% with the “door left wide open” for further cuts this year.
The economists, including Stephen Toplis and Craig Ebert, believe GDP growth will fall short of the Reserve Bank’s expectations and anticipate it will be “downhill” for the second half of the year.
In a downbeat note to the market, BNZ analysts predicted business confidence figures would “not only fall below the RBNZ’s forecasts” but would “end up lower than our relatively pessimistic predictions”.
An OCR cut next week is 90% priced in by financial markets, according to BNZ. The central bank will make its decision in next week’s MPS.
According to the economists, financial markets predict a "terminal low" OCR of 0.93%. Markets give a 30% probability rates could fall to 0.75%.
BNZ said New Zealand swap markets were starting to “toy” with the idea of a 0.75% OCR after the Reserve Bank of Australia cut rates earlier this month. Australian interest rates are expected to fall as low as 0.5%.
The BNZ economists predicted lower-for-longer rates as the RBNZ tries to get a grip on slowing growth.
“With the RBNZ likely to cut the OCR next week and retain some form of easing bias, domestic activity indicators providing little support for the RBNZ’s forecast of a pick-up in NZ growth over the second half of the year, and more RBA cuts ahead, the path of least resistance at the short-end of the NZ curve is probably towards still lower rates,” BNZ’s report added.