Reserve Bank expected to take a breather after slashing OCR to 1% in August

Tuesday, 24 September 2019

What does the official cash rate mean?

The Reserve Bank is widely expected to leave the Official Cash Rate unchanged at 1 per cent when it issues its next statement on the interest rate on Wednesday afternoon.

Reserve Bank governor Adrian Orr caught financial markets off-guard in August when he announced the bank had decided to lop half-a-percent, or 50 basis points, off the OCR.

But most analysts are forecasting that after that big cut it would now wait until its next monetary policy statement in November before deciding whether to reduce rates again.

ANZ last week forecast 25 basis-point cuts in November, February and May, which would take the OCR down to just 0.25 per cent.

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Since then, Statistics NZ has reported GDP growth in the three months to the end of June totalled 0.5 per cent.

Although that growth figure confirmed an economic slow down, the number was a little better than many analysts had feared.

Westpac, BNZ and ASB are also forecasting the Reserve Bank will wait until November before cutting again, but ASB senior rural economist Nathan Penny said that 'after last month's surprise, we're also not ruling anything out'.

Kirk Hope, chief executive of lobby group BusinessNZ, said on Monday that 'international tensions, protectionist trade policies and financial market volatility' were harming global and domestic growth, while 'regulatory change and uncertainty' were causing low business confidence.

A report published by the International Monetary Fund on Sunday described New Zealand's economic expansion as 'still solid' but said downside risks had increased as a result of the 'global economic outlook' and authorities should prepare contingency plans for 'a severe economic downturn'.

In that situation, the Reserve Bank would likely have to resort to 'an unconventional monetary policy response' which could include negative interest rates or asset purchases, and the Government should 'not hesitate to use New Zealand's substantial fiscal space to support activity', it said.

The Reserve Bank believes conventional interest rate cuts have not lost their power.

But the NZ Institute of Economic Research said many of its panelists were sceptical as to whether a further lowering of interest rates would boost economic activity and inflation.

'Some highlighted the financial stability risks with having monetary policy set too low, particularly with the effects on asset price inflation,' principal economist Christina Leung said.