Negative OCR in April 2021: Westpac

Business confidence indicators, such as the June BusinessNZ Performance of Services Index, reveal a strong bounce-back for the New Zealand economy, nearing pre-Covid levels.

"This doesn’t necessarily mean that policymakers can take their foot off the accelerator though," the Westpac team says.

"Low inflation is likely to remain a feature in the years to come, and monetary easing will need to continue beyond the guidance that the Reserve Bank has given to date."

The Westpac team, led by chief economist Dominick Stephens, believe fiscal stimulus will be "smaller than previously expected" because of the recovery, putting "downward pressure on our economic forecasts".

With less fiscal stimulus than expected, the analysts predict a shift to additional monetary stimulus.

"Less borrowing by the government will mean less scope to ease monetary policy through bond purchases. Both make it more likely that by next year the RBNZ will have to resort to other tools, such as a negative OCR."

Westpac believes next month's Monetary Policy Statement will see the Reserve Bank extend its bond purchase programme, lifting its cap by $20 billion. 

But the bank says the RBNZ "will start running out of government bonds to buy". 

"We expect that the RBNZ will cut the OCR to -0.5% in April 2021, in order to maintain the overall level of monetary easing that the economy will need."