Kiwibank economists are now picking the Reserve Bank will have to drop the Official Cash Rate to as low as 1.5%

The country’s bank economists have been honing their forecasts of future interest rates after last week’s Reserve Bank update, which clearly signalled a rate cut for next month.

The Official Cash Rate currently stands at a historic low of 2.25%, but the now widely expected cut next month would see this likely go down to a new record low of 2%.

But the major bank economists don’t see it ending there. Kiwibank economists are now the ‘market leaders’ if that’s the right term with their new pick that the OCR will ultimately have to be dropped to 1.5% by early next year.

The Kiwibank economists said the Reserve Bank had last week provided a “dovish assessment”, which had noted that the outlook for inflation had weakened since the RBNZ released its June Monetary Policy Statement, on the back of weaker global growth and a stubbornly high dollar.

“We believe the change to the inflation outlook warrants 50bps of extra cuts on top of the 25bps signalled in June – and we expect this view to be reflected in the RBNZ’s August MPS,” the Kiwibank economists said.

BNZ, ANZ and ASB economists are all picking a low of 1.75% for the OCR, while Westpac economists (the first among the major banks to pick the OCR going as low as 2%) are still officially picking a 2% low, but “concur that the risks are now skewed to a sub-2% OCR, though much will depend on the NZ dollar”.

ASB economists say they continue to expect the RBNZ to cut the OCR to 1.75%, with 25 basis point moves in August and November.

“The main difference between now and last week for our forecasts, is the second rate cut is now much more likely in our view, with markets now giving a 87% chance of a rate of 1.75% by the end of the year.”

ANZ economists noted in their weekly Market Focus that the RBNZ came out “all guns blazing last week” in an attempt to tackle low inflation, an elevated NZD and housing strength.

“An August OCR cut now looks assured,” the economists said.

“The RBNZ’s economic update noted it likely that further easing ‘will be’ required rather than ‘may be’, leaving little doubt.

“We don’t believe the economy is in need of additional easing right now given accelerating growth, an improving labour market (we’re picking strength in the HLFS data next week, which will serve as a reminder of how strong the economy is) and evidence of growing capacity strains.”  

The ANZ economists said they doubted the New Zealand dollar would move aggressively lower in the absence of a global meltdown (though they do regard there currently being “a non-trivial risk” of such an outcome).

“…There may be a few more cents left in the current NZD move lower, but the brutal reality is that: New Zealand’s growth story remains intact, we have far more political stability than others and interest rates – while low and set to be lower – are still well above international peers (refer our bond ladder below).

“…So we see the latest RBNZ moves as knocking the extremes off recent currency action as opposed to changing the trend.”