New Zealand's largest bank predicts Reserve Bank will slash interest rates

Thursday, 20 December 2018

ANZ chief economist Sharon Zollner has made a major call on the future direction of interest rates. At a time when interest rates globally are climbing, Zollner predicts the Reserve Bank will be forced to slash the official cash rate by 75 basis points to 1 per cent by 2020.

ANZ's economics team is predicting the official cash rate (OCR) will be slashed to 1 per cent.

The bank's chief economist, Sharon Zollner, made a major call change on Thursday, but played down the degree to which disappointing economic growth figures played in the decision.

Already at an all time low, the OCR is currently 1.75 per cent. Zollner predicts it will be cut to 1.5 per cent in November 2019, with a further 50 points of cuts in 2020 to 1 per cent.

'There are multiple drivers of this changed call but in short they come down to a weaker outlook for medium-term inflation, risks around global growth and liquidity, and the proposed capital changes for banks,' Zollner said in a research note.

Reserve Bank governor Adrian Orr has proposed making banks hold more capital, which would tend to see the amount they can increase lending slow.

'Our view of the New Zealand growth outlook has not materially changed.'

Earlier on Thursday, Statistics New Zealand said that the economy grew more slowly than economists had expected in the three months to September 30, with the three month period showing the weakest quarterly growth in almost five years. The annual change in economic output fell to 2.6 per cent, also the lowest in nearly five years.

Meanwhile, Statistics New Zealand said the economy grew faster than it had previously thought in 2017, effectively making the fall in growth in recent months more significant.

ANZ had previously appeared to be close to predicting that the next move in the OCR would be lower, but the signs in recent weeks have been that the outlook for the economy could have been improving.

Only this week, ANZ's monthly business outlook survey - a regular business confidence survey which has been the subject of much debate since the Government changed in late 2017 - showed business were becoming less pessimistic about how the economy will track and how they expect their own business will perform in the coming year.

Zollner said the timing of the call was ironic.

'It is certainly not a case of us expecting that the economy is about to roll over, and it is ironic that we are changing our call just as business sentiment indicators

are improving.

'But economic momentum is nonetheless a little softer. And equally importantly, upward revisions to historical [economic growth] imply a higher potential growth rate of the economy. This suggests that the Reserve Bank will conclude that a stronger growth rate is required in the future to see [household] inflation return sustainably to target.

Zollner said for this to happen, interest rates needed to be lower.

'In short, growth is now decelerating from its revised rate of around 3.5 per cent at the end of last year (previously estimated to be around 3 per cent), and yet core inflation remains well south of where it needs to be.'

Although customers do not borrow money at the rate of the ORC, it has an influence on the interest rates on mortgages and deposits.

At this stage it is impossible to tell what such a move would have on ordinary customers.

Part of the reason Zollner has made the call is that the Reserve Bank is currently proposing to require banks to hold much more capital - effectively requiring the banks to lend less aggressively.

All else being equal, that plan would see borrowing rates move higher.