'Watch, worry and wait': Economist on OCR forecast

Following The Reserve Bank's bold 50 basis points (bp) cut to the Official Cash Rate (OCR) in August, all eyes are on Wednesday's decision.

Challenges of a deteriorating global outlook, falling GDP growth and low confidence haven't gone away, leaving savers and borrowers wondering if 1 percent set a new benchmark of just how low interest rates could go.

Economist Shamubeel Eaqub told Newshub that there's nothing in the current environment to suggest that The Reserve Bank will continue along the cutting path.  

Contrary to the bank's long-standing influence in using interest rate cuts to trigger spending, they don't seem to be very effective right now.

"[The majority of] borrowers are on fixed rates, which are cheaper than floating and as the economic outlook is uncertain, people are unlikely to borrow.

"Savers, typically the older [generation], are hurting right now.

"The further The Reserve Bank cuts [the OCR], the more careful people will be," Eaqub said.

Jeremy Couchman, senior economist at Kiwibank, said that while the New Zealand exchange rate has fallen, it's too early to determine the effects of the August cut.   

"The decision to cut 50bp to 1 percent in August effectively brought forward one cut to deliver a two-for-one hit."

Couchman said that although the lower exchange rate will help to support the export sector and stir economic activity, as business and consumer confidence remain weak, a jump in consumer spending isn't expected for the remainder of the year.

Michael Callaghan, an economist at ANZ, supports the view that The Reserve Bank is likely to want to let the dust settle following the August cut.

"We expect The RBNZ will leave the OCR on hold at 1 percent, but leave the door open to further cuts," Callaghan said in the ANZ September OCR preview.

While The Reserve Bank would likely want to assess whether the August cut has had an impact on the economy and by how much, there's still plenty to be concerned about.

"The Reserve Bank's 50bp cut hasn't caused any [noticeable] improvement in business and consumer confidence, or inflation expectation indicators," he said.

The ANZ preview also said that following the August cut, The Reserve Bank global outlook is due for a downgrade following weakness in New Zealand trading partners.  

Despite the large cut in August, it's not clear that consumers are in the mood to spend.  

"The ANZ Business Outlook is dismal, with several key indicators [including investment and employment intentions] falling to post-GFC lows," Callaghan said.

The picture for November and beyond

While ANZ economists are forecasting OCR cuts of 25bp in November, February and May, Kiwibank's focus is on a November cut to 0.75 percent.

While not yet convinced of the need for further cuts, Couchman puts a 40 percent chance on the rate going much lower.

"Recent data and developments have increased the possibility that the RBNZ does cut [the] OCR [to] just 0.5 percent.

"If economic developments continue to deteriorate, we would then shift our call to further cuts," Couchman added.

Eaqub's view is that as the power of interest rate cuts appear to be losing effect over the local economy, the proposed bank capital review could make them more risk-averse and tighten lending criteria, affecting household spending.   

Echoing the view that interest rate cuts are less effective, Couchman said that what's missing is not monetary policy response, it's fiscal.

"It's high time for the Government to inject much-needed investment," he added.

A lower New Zealand dollar, solid labour market (tempered by lower employment intentions) and weakened GDP are cited as reasons for the Reserve Bank to hold off on a further cut so soon.

"For now, a 'watch, worry, and wait' stance seems the most likely outcome of the OCR review," Callaghan said. 

"There's time to observe how rate cuts are filtering through to activity and confidence, and there's no smoking gun in the data to warrant an urgent move." 

With the OCR announcement due on Wednesday, the general consensus is no change, with another cut in November and the possibility of more for 2020.

For borrowers, taking a wait-and-see approach wouldn't hurt, as it's likely the low-interest rate environment will stay put for a while.