Westpac economists predicts OCR cut to historic low
(20 July 2015 – New Zealand) Westpac chief economist Dominick Stephens is predicting the Reserve Bank of New Zealand (RBNZ) will cut the Official Cash Rate (OCR) to an historic low in the near future.
Stephens said by the end of the year he expects the OCR to be at 2 percent to combat falling dairy prices, the slowing Christchurch rebuild and low inflation.
If the OCR was cut to 2 percent, it would stimulate the economy and be much cheaper to lend money.
Stephens said the latest season was even worse for dairy than expected.
"I think this is going to be very severe for the dairy industry," Stephens said.
"I know farmers are resilient and will find ways to get through, but in the meantime this is really going to affect economic confidence, downstream spending, investment pending, farm conversions, irrigation schemes - there's going to be a severe effect on economic confidence."
While Westpac sees the Christchurch rebuild as slowing, it believes residential work will decline around the same rate that commercial work would build, with the two continuing to balance each other out.
The slow-down of the Canterbury rebuild would have a much broader effect on the New Zealand economy, he said, and was a key contributor to their change in prediction for interest rates.
"The Canterbury rebuild has been contributing 0.2 to 0.4 percentage points per quarter to New Zealand GDP growth over the past two to three years.
"We think over the next year it will contribute zero, and from 2016 onwards it will be a major negative for growth."
Also adding to Stephen’s prediction is the latest Consumers Price Index (CPI) result showing a rise of 0.4 percent, taking inflation to 0.3 percent for the year – well below the RBNZ’s target for inflation of between 1 – 3 percent.
Westpac is predicting a drop of 0.25 percentage points at every RBNZ review of the OCR till the end of the year, and at least one 0.5 percentage point drop.
He said a 0.5 percentage point reduction was possible at this month’s review, but more likely to come in September.
Subscribe