'Coronavirus outbreak reinforces OCR cut as a possibility' - economist

The Reserve Bank kept the Official Cash Rate at 1 percent in its last two reviews: is it now time for it to drop?
Ahead of the Official Cash Rate (OCR) announcement on Wednesday, Newshub asked local economists whether a cut is likely.

Although ASB Bank chief economist Nick Tuffley expects the OCR to drop again, he said that he doesn't expect another cut so soon.
"Business confidence has started to recover, which reduces one key risk: that businesses pull back on hiring and investment," Tuffley said.  
There was strong growth in the quarter to September, although revisions showed it was weaker than reported over the first half of 2019.
"The housing market and consumer spending are both clearly responding to the past drops in interest rates - and inflation looks like it will hold sufficiently close to two percent," Tuffley added.
Economist Cameron Bagrie said that the Reserve Bank is likely to be pleased they got a couple of cuts in last year.  As they're still working their way through the system, he doesn't expect another cut so soon.
"We're in a pretty fortunate position at the moment where the Reserve Bank cut in 2019, the Government stepped up to the plate and pushed more money into the system [and] the NZ Dollar has come down.

"The framework [has] kicked in and put a bit more petrol in New Zealand's car - I don't think there's an overwhelming case for the OCR to go down," Bagrie said.

However, following the Coronavirus outbreak, there are risks to the global economy and it's uncertain how they'll play out.

"We continue to expect an eventual OCR cut, and the outbreak reinforces that an OCR cut is a possibility," Tuffley said.

"The whole global scene is crumbling - its got risks raked all over it," Bagrie said.

"If we start to see these risks internationally manifest into reality, then watch out - the Reserve Bank is going to have to step up," Bagrie added.

Homeowners coming off a fixed-term interest rate are able to take advantage of the current low-interest rates and re-fix, but for first home-buyers, they're a "double-edged sword."

"They make financing more comfortable, but are also contributing to house price growth and making the entry purchase cost higher," Tuffley said.

If interest rates were to drop again, falling deposits could see lending restrictions tighten.

"We've seen deposit growth go under rocks in the past six months - that constrains the ability of banks to push money out the door," Bagrie said.

"We can't keep on taking deposit rates down because people just aren't going to put money in the bank - then the banks can't lend on the other side."

The OCR was cut twice in 2019: by 25 basis points in May and 50 basis points in August and has since stayed at 1 percent.

The Reserve Bank will make its first OCR announcement of the year on Wednesday.