Bets are off on further drop to Official Cash Rate in 2019

Tough call: Will the OCR fall below 1 percent?
Tough call: Will the OCR fall below 1 percent? Photo credit: Getty.

Following the Reserve Bank's decision to maintain the status quo on the Official Cash Rate in September, all eyes are on Wednesday's decision: will it fall below 1 percent?

Newshub asked two local economists to share their views on whether the Official Cash Rate (OCR) will drop again, and by how much.

Business confidence may be starting to climb back, but indicators of a continued slowdown in local economic growth mean that their expectations lean towards another cut.

Referring to the decision as a "tough call", Sharon Zollner, chief economist at ANZ said the decision is likely to be swayed in the interests of supporting growth.

"Dairy prices, both current and future are looking really strong [and] meat prices are going gangbusters, thanks to the swine fever in China," Zollner said.

"Slowing global growth, [coupled] with New Zealand's commodity prices going up makes for a forecasting conundrum." 

Despite the positive indicators, new data on inflation expectations coinciding with the review date could turn the decision over.

"[The Reserve Bank] will be revising down their growth forecasts and we assume that will win out," Zollner said.

Jarod Kerr, chief economist at Kiwibank told Newshub that he expects the Official Cash Rate to be cut by 25 basis points (bp), to 0.75 percent - on a par with the rate across the ditch, although a month ago, the bank's expectation of a cut was higher.

"The path of least resistance - and least regret - is down [and] we'd assign a 60 to 70 percent probability of a cut.  

"A month ago, we had assigned a 70 to 80 percent chance."

Kerr said that since the last OCR review, the sharp recovery in the financial markets outlook has been surprising, but for now, the good news doesn't outweigh the bad.

"US-China tensions has eased, for now, and Brexit has been delayed, again. 

"The risks remain asymmetric, however, to the downside."

In deciding whether to cut the OCR, a key question The Reserve Bank is likely to address is whether the hefty 50bp cut in August provided sufficient stimulus to lift inflation and spending and whether it should continue to let the dust settle.

Although low-interest rates have made it cheaper to borrow, from a monetary perspective, the housing market is still a concern and a lower OCR may be part of the solution.

 "[The August cut] has been effective in lowering mortgage rates, supporting [a] pick-up in housing. 

"But The Reserve Bank can't allow the housing market off its leash as there are financial stability concerns with doing so," Zollner said. 

Similarly, a lower OCR does little for businesses unable to borrow and business investment may be below current forecasts. 

"The Reserve Bank credit conditions survey said that credit is tightening for big business, commercial property and agriculture. 

"The interest rate doesn't matter if you can't get a loan," Zoller added.

Although bets are off on whether The Official Cash Rate will drop on Wednesday, economists remain doubtful that New Zealand will follow in the footsteps of Switzerland with a sub-zero rate.

"It should be a near-zero probability - I don't believe negative rates are effective," Kerr said.

Negative interest rates can make matters worse by reinforcing fears and fuelling deflationary expectations.

"The risk of a recession is around 30 percent.  It should take a severe recession to draw out a negative rate policy and that could be a mistake," Kerr added.

Echoing thoughts that negative interest rates aren't likely to be effective, Zollner puts a 10 percent chance on it.

"I don't think it would be a good idea, but that doesn't mean it won't happen." 

On a positive note, aside from being a breath of fresh air for borrowers, record low-interest rates may encourage much-needed investment in the local economy.  

"Large scale infrastructure projects are needed to break the many bottlenecks inhibiting our productivity. 

"It's a role the Government must lead, with significant buy-in from private sector business," Kerr said.

While economists' forecasts are tentative on whether the OCR will drop again this year, borrowers and savers sitting on opposite sides of the fence can only wait for the decision with bated breath.