Westpac chief economist Dominick Stephens has upped the ante on his expectations for Official Cash Rate cuts, saying he now expects three more this year instead of two.
“Before today we were forecasting 25 basis point OCR reductions in July and September,” Stephens says.
“On top of the June cut that has already occurred, our forecast implied a total of three OCR cuts in 2015, and a terminal OCR of 2.75%. In our commentary we noted there was a risk of a fourth OCR cut this year. Over the past week emerging news has shifted that fourth cut from a risk scenario to a likelihood. Accordingly, we are now forecasting 25 basis points OCR reductions in July, September and October. This will take the OCR to a low of 2.5% this year.”
“Commensurate with our lower OCR forecast, we are now forecasting an average NZ dollar/US dollar exchange rate of 62 cents in the December quarter of 2015,” says Stephens.
There are a series of reasons for the Westpac economists’ changed view. These include a marked deterioration in NZ economic sentiment as shown in the Westpac’s consumer confidence, regional economic confidence and employment confidence surveys, as well as ANZ’s Business Outlook survey, which showed business confidence in the red for the first time since the February 2011 Christchurch earthquake, and the latest sharp drop in global dairy prices.
Stephens notes the Reserve Bank is currently acutely focussed on dairy prices.
Other factors in the changed OCR outlook at Westpac include the sharp sell-off in the Chinese sharemarket, and a concern lower confidence could impact commodity prices and New Zealand businesses’ investment and employment decisions. Then there are heightened tensions in Greece, which could also affect confidence.
“Of course, there have also been recent developments that lean against OCR cuts. These include the plunging exchange rate, which will provoke inflation, and the housing market,” says Stephens.
“Emerging data suggests that the combination of proposed tax changes, new loan-to-value ratio (LVR) rules, and lower mortgage rates has been positive for house prices on balance – the Auckland market in particular continues to power ahead. All of these developments must be considered in the context of a central bank that is under pressure to lift inflation towards 2%, is wary of further downside surprises to inflation, and is sounding rather dismissive of the inflation risks posed by rising house prices.”
“It is this context that leads us to comfortably conclude that a 2.5% OCR by year-end is the best forecast at present. At the July (23) OCR review we expect the Reserve Bank to cut the OCR by 25 basis points and explicitly signal further OCR reductions, perhaps by repeating the phrase ‘we expect further easing may be appropriate’,” says Stephens.
ASB economists are picking a further three consecutive OCR cuts by October, and ANZ’s economists also think the Reserve Bank will drop the OCR by a further three-quarters of a percent, but they reckon the final reduction to 2.5% will take place in March. In contrast BNZ’s Stephen Toplis expects the Reserve Bank to cut the OCR by 25 basis points in July to 3%. June’s 25 basis points cut to the OCR, to 3.25%, was the first time the Reserve Bank has cut it since a 50 basis points cut in March 2011. There were four increases to the OCR between March and July last year.