The Reserve Bank slashed the OCR by 50 basis points to the historic low of 1.0% in August and many economists expect that it will cut it at least once more in this cycle.
But ANZ chief economist Sharon Zollner says they now expect 25 basis point OCR cuts in November, February and May, which would take the OCR to 0.25%.
They would not rule out another cut as soon as September, but it is not their central view, she says.
“The forecast 25 basis point May cut is a placeholder for the impact of the Reserve Bank’s capital proposals, the details of which are as yet unknown.”
This forecast is because global and domestic economic signals continue to worsen and Zollner gives seven reasons why they think the Reserve Bank will decide that it’s time for decisive action.
These include the deterioration of near-term domestic growth indicators as well as the global environment; slipping inflation expectations; and the likelihood the Australian Reserve Bank will cut their OCR to 0.25% by May 2020.
Additionally, the labour market outlook is worsening; the outlook for the dairy sector is troubling; and the Reserve Bank’s plans to lift bank capital requirements are likely to have significant impacts on both the price and availability of credit.
Zollner says New Zealand is experiencing a “growth stall” and it’s not an exaggeration to say that it is pretty much one-way traffic out there.
The only easily identifiable upward risk at present is that the housing market could take off again in response to the record-low mortgage (and term deposit) rates, she says.
“However, what the low OCR giveth, the LVR restrictions taketh away. And any housing flurry might also get rudely interrupted if the labour market tightness dissipates as rapidly as the indicators are suggesting it might.”
While there is no fundamental reason for the economy to go into recession, Zollner says the prospect of the economy accelerating to above-trend growth looks a long way off.
“The Reserve Bank will conclude it can’t afford to wait and see. Each successive cut from here is likely to be less stimulatory than the last, but they’ll throw what they’ve got at it.
“Our new forecast endpoint for the OCR is right at the limit of where we estimate conventional monetary policy effectiveness ends.”
Down the track, there’s scope to get creative with unconventional policy but conventional OCR cuts are a logical start, Zollner adds.