Drop or not: The Reserve Bank will review the Official Cash Rate on Wednesday

Interest rate graph with arrow pointing downwards.
Experts expect the Official Cash Rate to remain at 0.25 percent. Photo credit: Getty.

The Reserve Bank is set to make an announcement on the Official Cash Rate (OCR) on Wednesday. 

Currently 0.25 percent, the Reserve Bank left the OCR unchanged in May. To inject money into the economy and reduce the cost of borrowing, the large scale asset purchase (LSAP) programme limit increased to $60 billion. 

The effects of COVID-19 continue to play out in the economy, with Gross Domestic Product (GDP) falling by 1.6 percent in the March quarter. However, economists at ANZ and Kiwibank expect the OCR to remain unchanged.

ANZ chief economist Sharon Zollner said that upon delivering the 0.75 basis point cut in March, the Reserve Bank signaled the OCR would remain at that level for at least 12 months. There is currently no reason for the Reserve Bank to retract that decision.

"The [Reserve Bank) has ruled out changing the OCR and there's no need to adjust qualitative easing yet," Zollner said.

Retail interest rates had since fallen to all-time lows: fixed mortgage rates now start from 2.65 percent and floating rates from 3.4 percent.  

"The trend is gently downward and at present I see no reason for that to change," Zollner added.

Kiwibank chief economist Jarrod Kerr said last week's GDP report was worse than expected, but the 1.6 percent drop was less than the Reserve Bank estimate of -2.4 percent.  

He expects the Reserve Bank to leave the OCR where it is and use other monetary tools if needed.

"I think we're in a period of waiting and watching for a while. It's time to assess the damage -  and the strength of the rebound," Kerr said.

A sharp bounce in spending and activity following COVID-19 lockdown was a positive sign, but  the Reserve Bank is likely to balance this against the weakening global outlook and stronger New Zealand dollar. 

"An overly optimistic RBNZ commentary would put enormous upward pressure on the currency, at a time of stress for many exporters," Kerr added.

The large scale asset purchase (LSAP) programme is the most useful tool in the COVID-19  crisis. The limit could be increased above the current $60 billion.  

"LSAPs are a powerful tool in stabilising financial markets, flattening interest rates, and reflating expectations," Kerr said.

"Given economic stresses, we'd expect the Reserve Bank to ramp up LSAPs in August."

Providing low-cost term funding for banks would be the best "next step" and is a tool that the Reserve Bank could use, if required.

"Such a facility would reduce bank dependence on both retail and wholesale markets [and] all borrowing and lending rates would likely fall as a result."

A negative OCR could become an option in future, but the Reserve Bank said in May that financial institutions weren't operationally ready. Its view was that further OCR drops wouldn't be effective in reducing borrowing rates.

"Evidence shows negative rates cause a perverse increase in savings and lowers inflation expectations...we believe they're the last resort," Kerr said.

"Although negative rates can't be ruled out, we don't expect a negative OCR in this cycle." 

The OCR is currently 0.25 percent. In Australia, the cash rate was cut by 25 basis points on March 20, and has since remained at 0.25 percent. The Federal Reserve is currently between 0 and 0.25 percent.  

The Reserve Bank will make an OCR announcement on Wednesday.  

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