OCR will fall to 0.75%: Kiwibank

Until now, Kiwibank economists predicted rates would fall just one more time this year, to 1.25%, at this month’s MPS.

However, “global uncertainties”, the Reserve Bank of Australia’s rate cut drive, and a “softening domestic economy” have made economists, including Jeremy Couchman, change their mind.

They now give a “60%-70%” probability of the Official Cash Rate falling to 0.75%.

In their latest market outlook, the economists say cuts to 0.75% are “likely”, amid heightened global uncertainties.

The outlook in New Zealand, the economists warned, was just as dire.

“Forward indicators of growth have weakened. The cost pressure firms complain of is not being passed on. That’s a sign of weakness.

“Business confidence remains in the doldrums and is impacting growth. What we need is a significant lift in fiscal stimulus. What we’re getting is a significant cut in monetary policy,” the economists said.

The Kiwibank economists say the chances of cuts below 75 basis points “diminish rapidly”. They believe the central bank would be more likely to pursue quantitative easing at that point.

Couchman and chief economist Jarrod Kerr voiced concerns about the potential impact of the Reserve Bank’s new capital rules as the economy continues to stutter.

“What we worry about, is the potential restriction in lending growth as the banks prepare to load more capital. A likely outcome is a segregation in pricing and availability of credit to households and businesses,” they said.