Where to next for interest rates? ANZ makes its call

Name: What is the OCR?
Uploaded: 2019-11-07T17:27:54+13:00
Duration: 189 s
Description: Business Editor at Large Liam Dann explains the Official Cash Rate, and how the Reserve Bank sets the OCR to influence the economy.

By Jamie Gray

Business Reporter·NZ Herald·

20 Jan, 2020 08:37 PM3 mins to read

Business Editor at Large Liam Dann explains the Official Cash Rate, and how the Reserve Bank sets the OCR to influence the economy.

The ANZ Bank has removed the official cash rate cut it had pencilled in for May, and now expects the rate to stay flat at the current 1.0 per cent.

Most banks still expect the Reserve Bank to cut its rate at some point this year, but some are coming around to the possibility that the current rate could be the bottom.

ASB Bank, commenting on last week's buoyant real estate data, said there was a risk the central bank may not have to cut again.

ANZ chief economist Sharon Zollner said in a commentary this morning that ANZ's central forecast was for a flat official cash rate (OCR) track.

"Since the November monetary policy statement, forward-looking activity indicators have improved, the Government has announced more spending is in the pipeline, the housing market has strengthened, and inflation looks like it is sitting close to target," she said.

"It's true that revisions mean that GDP decelerated more sharply over 2019 than previously thought," she said.

"But momentum appears to be stabilising, and it now looks more likely that the economy will be able to generate growth around trend over the medium term, despite headwinds," Zollner said.

ANZ chief economist Sharon Zollner. Photo / NZ Herald.

The Reserve Bank had scope to be patient and await further signals on the economic direction, but the downside risks have not gone away, she said.

"We see the market's pricing of a decent chance of further cuts as entirely appropriate – but a near-term cut would require an abrupt change of circumstances," she said.

"Although we expect a flat OCR in coming quarters, the road ahead for market pricing may continue to be bumpy as developments unfold."

ASB Bank, in its commentary on REINZ real estate data for December, said the release joined the collection of other economic data suggesting the New Zealand economy had a strong end to 2019.

House price inflation was accelerating faster than the Reserve Bank's expectations and the data added to the risk the bank won't have to cut interest rates again, ASB said.

Consumer price data for the last quarter of 2019, due on Friday, is expected to show inflation moved close to the Reserve Bank's desired annual mid-point of 2 per cent, thereby reducing the need for further rate cuts.

The Reserve Bank's next review of the OCR is due on February 12.