Markets price in strong chance of 0% OCR

Current wholesale market pricing puts the Official Cash Rate at 0.05% by November, "an 80% chance the OCR is reduced to zero, in other words", ASB said. 

It comes ahead of next week's Monetary Policy Statement, the first since Covid-19 took a stranglehold on the global economy. 

The Reserve Bank is not expected to make any changes to the central bank rate next week, after pledging to keep the OCR at 0.25% for 12 months. The RBNZ slashed the rate in an emergency cut on March 16.

The promise to keep the OCR on hold has not dampened speculation of a further cut, and financial markets seem to expect another move as the economy deteriorates.

Westpac economists believe the OCR could fall to -0.5% following the once-in-a-century pandemic. 

ASB's team believes the government's fiscal stimulus package could be increased next week, lessening the need for another OCR cut. 

ASB economists, including Nick Tuffley, point out the Reserve Bank's prior guidance suggests it will not change its mind.

The Reserve Bank previously stated its guidance to keep the OCR on hold for 12 months would "provide clarity to financial market participants that a negative OCR would not be implemented over this period”.

"Of course, the RBNZ is free to change its mind, and that commitment predated the economic impact of NZ’s dramatic Covid lockdown," ASB added.

The team of economists believe QE remains the government's "more effective policy tool", "and the Bank will keep it as its policy easing headline act for a while".