OCR will fall further: economists react to shock cut

The Reserve Bank cut the OCR to just 1% yesterday due to growth and international trade concerns, but economists say the policy action will not stop there.

Stephen Toplis, head of research at BNZ markets, said: “Yet again, Governor Orr (and his committee) has shown that they want to get “in front of the curve”. Rather than cut 25 basis points, and indicate that another rate cut was likely, they decided to not pussyfoot around and, instead, throw everything at the market at once.”

BNZ’s markets team predicts the central bank will hold off on further cuts until November, but said “September cannot be ruled out”. He added: “Nor can we rule out interest rates bottoming at lower than 0.75%.”

Toplis questioned whether yesterday’s rate cut would spur business investment or drive economic growth: “If we are right and growth fails to bounce then what will stand in the way of the RBNZ cutting the cash rate to even lower levels than we are now suggesting?”

The decision to cut the OCR by 50 basis points is an unprecedented move. In the past, the RBNZ has only taken such drastic action after a major emergency, such as the 2011 Christchurch earthquake, or a financial meltdown like the GFC.

Economists report yesterday’s OCR cut has already had an impact on wholesale interest rates. Banks have passed on the cuts with floating rate and revolving credit facilities.

ASB’s Nick Tuffley welcomed the cuts: “Kudos to the Monetary Policy Committee for getting on with it, given the economic forecasts called for around 60 basis points in total of OCR cuts.”

Tuffley also forecasts a cut to 0.75% in November, and says a September cut is “unlikely”, “barring an unmistakable global turn for the worse”. He says the OCR is likely to trough at 0.75%.

Kiwibank economists Jarrod Kerr and Jeremy Couchman expect further cuts and “don’t think they [the RBNZ] will stop there”.

The bank has moved forward its forecast for a 0.75% OCR by six months, giving an “80%-90%” likelihood the rate will fall further.

The economists said the possibility of a 0.5% OCR has grown “from our earlier estimate of 20-30%, to 40%”.

They say low interest rates are here to stay: “The key takeaway for financial markets is interest rates will likely fall even further and hold in an even lower-for-longer range. And we continue to expect a volatile descent in the Kiwi dollar.”

The economists believe the central bank will continue to take action as long as inflation and growth figures remain flat.

“One key message from the media statement, was “monetary policy is still effective”, although we’d argue with diminishing returns. What that means, is the central bank will keep cutting if growth and inflation continues to disappoint.”

Yesterday’s deep rate cut has prompted growing talk of a move to 0% or even negative interest rates, which have been a common feature in Japan for decades.

Reserve Bank governor Adrian Orr told reporters yesterday there was a “real possibility” New Zealand may one day have negative rates. He said decisive early rate cut action likely “reduces the probability” of that happening.