What are the chances of a bigger OCR cut next time around?

Thursday, 26 September 2024

Lloyd Burr explains why there's always a difference between the Official Cash Rate (OCR) and the mortgage rates banks charge us.

The US Federal Reserve slashed its interest rate by 50 basis points last week.

Local economists don’t expect the Reserve Bank to follow suit.

Instead, they are forecasting two more 25bp cuts before the end of the year.

The Reserve Bank is unlikely to follow the US central bank and slash 50 basis points off the official cash rate next month, economists say.

Instead, the RBNZ is expected to make two smaller cuts before the end of the year, bringing more staggered relief to mortgage holders.

The OCR drives the rate banks pay when they borrow from the RBNZ and is a major factor in the rates banks then charge customers for things like home loans, and pay for term deposits.

Economists are tipping the official cash rate will be cut by another 50 basis points by the end of the year, most likely spread over two meetings.

At its August meeting, the RBNZ trimmed the OCR by 25 basis points to 5.25%, the first cut in four years, and economists expect to see the rate fall by the same amount on October 9.

But whether the central bank might make an even larger cut has been a hot topic this week, after the US Federal Reserve cut its rate by 50bp.

Kiwibank’s team, led by chief economist Jarrod Kerr, said the Federal Reserve’s move was a sign it was “serious about removing the chokehold on the US economy.”

Here, the RBNZ was also expected to make another 50bp of cuts by the end of the year, he said.

“A rate cut in October is as close to a done deal as you get. In fact, we’d argue the only discussion should be on delivering 25 or 50 [basis points],” he said.

“We’d advocate 50. And again, 50 in November.”

Kiwibank chief economist Jarrod Kerr says the only discussion the RBNZ should be having about the OCR is whether to cut it by 25 or 50 basis points. (File photo)

Economic output had contracted in five of the last seven quarters, most recently with a 0.2% decline in GDP over the June quarter and, although that fall was not as large as many economists had forecast, it was still a fall, Kerr said.

“There is light at the end of the tunnel, and it’s burning brighter. We think the RBNZ’s decision to cut the cash rate in August marks the turning point in this cycle.”

Given the softening in economic conditions, Westpac’s economists were forecasting cuts of 25bp at each of the RBNZ’s two remaining meetings for the year, and another 100bp over 2025.

That would see the OCR fall to 3.75% by the end of next year.

ASB senior economist Kim Mundy said further rate cuts should help spur some economic growth, but ongoing headwinds suggested a rapid turnaround in the economy was unlikely.

“We continue to expect the RBNZ to cut the OCR by another 50bp in 2024 ‒ 25bp in October and November ‒ with steady declines over 2025, taking the OCR to 3.25%.

“Weak demand and a cooling labour market will help to reinforce that inflation is on track to fall back within target and, importantly, stay there.”