NZIER expects 'sustained period of growth' on back of low interest rates

Thursday, 30 May 2019

What does the official cash rate mean?

Economists expect a low official cash rate to give the economy a boost over the coming year.

NZIER has released its latest quarterly predictions, in which economists said they expected another cash rate cut in September.

The official cash rate (OCR) is currently at 1.5 per cent - an historic low.

Principal economist Christina Leung expected the next rate cut to increase economic activity. NZIER expects annual gross domestic product (GDP) growth to average around 2.6 per cent over the next five years.

It was 3.4 per cent over the previous five.

* NZIER expects solid economic growth for next five years

* New Zealand businesses increasingly confident, but less profitable**

Low mortgage rates and the decision not to apply a capital gains tax make housing a more appealing investment.

She said, to the extent that the lower OCR flowed through to mortgage rates, it would underpin renewed demand for housing.

'Particularly combined with easing of the loan-to-value restrictions for property investors we saw earlier in the year and now a capital gains tax is off the table, it makes it more attractive as an investment.'

Westpac chief economist Dominick Stephens said it was possible that the cash rate was already low enough to not require further easing.

He also expected GDP growth to pick up from the second half of this year, hitting a peak of 3.1 per cent over 2020.

He said the decision not to introduce a capital gains tax could go some way to alleviate gloom felt among businesses, and give a boost to investment and hiring.

It also altered the outlook for the housing market, which had experienced one of the most substantial falls in mortgage rates seen in some time.

'We now expect house price growth to re-accelerate to 7 per cent next year. That in turn will help to underpin household spending growth over the next couple of years.

'To keep this in perspective, a 7 per cent rise in house prices is fairly modest compared to previous upswings,' Stephens said.

'There are still policy-related headwinds for the housing market, such as the foreign buyer ban and the ringfencing of losses on rental properties. And we expect that the differences in regional housing markets will persist for a while longer: Auckland prices could go from falling to slightly rising, while prices elsewhere may accelerate slightly.'

Leung said the lower New Zealand dollar would reduce the extent to which New Zealand retailers could lift their prices. Any significant increase in headline inflation was likely to be driven by rising petrol prices, she said.

NZIER noted that the trade war between the United States and China was a risk to global growth outlook.

'Although demand from China for New Zealand exports is currently strong, we expect some easing in demand over the coming years. An easing in the terms of trade will reduce export returns,' Leung said.