'No urgency': No Official Cash Rate drop a foregone conclusion - economist

Businessman holding dice
Leading economists don't expect the OCR to drop on Wednesday. Photo credit: Getty.

The Reserve Bank will keep the Official Cash Rate unchanged and instead confirm use of other tools to stimulate growth, leading economists say. 

The Reserve Bank is set to make a monetary policy announcement on Wednesday. Currently at 0.25 percent, the central bank signalled in March the OCR wouldn't change for at least 12 months. 

In it's June statement, it said the large scale asset purchase (LSAP) programme, currently set at $60 billion, would be a key driver in keeping interest rates low. Since June, globally, things have got worse due to the ongoing COVID-19 pandemic. There are potential impacts on export demand and terms of trade. But locally, economic activity was better-than-expected - and so was the official unemployment rate for June.

ASB chief economist Nick Tuffley, said as the economy had "fared better" than Reserve Bank May forecasts (completed during alert level 3), there was "no urgency" for it to act. 

But to give financial markets longer-term confidence, the limit on the Large Scale Asset Purchase (LSAP) programme could increase.

"We see a possibility that the RBNZ lifts the purchase ceiling for its Large Scale Asset Purchase programme to $80 billion, from the current $60 billion and extends the end date for past May 2021," Tuffley said.

Echoing Tuffley's comments, Kiwibank chief economist Jarrod Kerr, said the LSAP programme is a key focus for financial traders. To keep Government bond yields low and flat, the programme must be increased - that required a longer-term commitment.

"Extending the LSAPs to May 2022 (or beyond if they want to get serious), pushes the program towards $100b.  We believe the LSAP program will ultimately end up near $120b in years to come," Kerr said.

The introduction of a term lending programme would likely come second. It would give banks access to low-cost funding to reduce their costs.  

"Cheap bank lending is a surefire way of lowering retail rates even further," Kerr added.

In Kerr's view, negative rates "reinforce negative thoughts", particularly around inflation and safety of the financial system. But as banks have been asked to be "operationally ready" for a negative OCR by the end of this year, in 2021, it could go lower.

For now, mortgage rates are expected to stay around the same level. Borrowers who don't want to miss out on potential savings from locking in a lower rate could look at variable and short-term fixed interest rates.

"Looking purely at potential costs over a five-year time horizon, generally the best value is fixing for terms [of] one year up to two years...though the longer someone fixes for the more flexibility they're giving up," Tuffley said.

The LSAP programme is a tool used by the Reserve Bank to increase the amount of cash in the system and reduce longer-term borrowing costs for households and businesses. It buys secondary-market government debt in the form of bonds, in exchange for cash.  

Sellers are encouraged to put the money into other assets, such as company shares, bonds or lending. Increased asset prices and lower yields help to keep longer-term interest rates, including borrowing rates, low.

The Reserve Bank will make a monetary policy announcement on Wednesday.