PM doesn't see OCR cut on August 11 more likely after Brexit vote; says RBNZ still forecasting 3%-plus growth; Wheeler still has buffer, but Brexit no reason to cut by itself, he says; New FTA needed with UK post Brexit

By Bernard Hickey

Prime Minister John Key has downplayed market expectations that Friday’s Brexit vote makes it more likely the Reserve Bank will cut the Official Cash Rate again on August 11.

Economists and financial markets increased their expectations the OCR will be cut again from 2.25% after Britain voted 51.9% to leave the European Union, with most seeing a cut as near certain. Financial markets are also pricing in higher chances of further cuts to 1.75% or beyond.

“I don’t think so in the short term, primarily because what he’s looking at is the strength of the economy,” Key told Guyon Espiner on RNZ when asked if Brexit made an OCR cut by Governor Wheeler more likely in the short term.

“And if you look at his last Monetary Policy Statement he effectively had growth at a slightly stronger rate than the Treasury, he’s north of 3%. I think he will look at the world markets. One could argue he’s got room to move if he needed to,” he said.

“That’s probably a buffer that’s useful from Graeme Wheeler’s perspective, but I don’t think of itself it will make him cut.”

Some bank economists have argued that financial turmoil would increase bank funding costs on international markets, which might either push up mortgage rates in the absence of more OCR cuts, or stop them falling if the OCR was cut.

“The uncertainty will also result in higher bank funding costs for New Zealand. This means that although NZ two-year swap rates are falling, mortgage rates and business lending rates are unlikely to fall as far (or may not fall at all),” Westpac Chief Economist Dominick Stephens said.

New trade deal needed

Key acknowledged, however, that New Zealand would have to forge a new trade deal with Britain, and continue on with its talks for a separate trade deal with the EU.

“At the moment we’ve got access for people and goods in the UK under the existing rules that have been negotiated. What we’ve got is an agreement from British and EU officials that those rules will remain until new rules are negotiated, so fundamentally we need a new agreement — we need an FTA,” he said.

Todd McClay said he expected to meet many of European Trade Minister counterparts at the G20 meeting in Shanghai on July 9-10 and he had already requested meetings with ministers and the EU Trade Commissioner.

“In the meantime, it is important for exporters to be assured that our economic relationship with the UK and Europe will remain the same for the foreseeable future,” he said, adding the actual Brexit process could take anything from two to six years.