Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell.
Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell.
Pundits predict OCR fall to 2.5% by end of year
Reserve Bank governor Graeme Wheeler yesterday delivered the 25 basis points cut to the official cash rate down to 3 per cent that the markets had expected and foreshadowed more to come.
The bank's forward guidance maintained, even strengthened its easing bias: "At this point some further easing seems likely" where six weeks ago it was "further easing may be appropriate".
Deutsche Bank chief economist Darren Gibbs sees that as official sanctioning of market pricing of at least one further rate cut at the next review on September 10. Gibbs is among the majority of analysts who expect a fourth cut, fully unwinding last year's tightening, by the end of the year.
The Reserve Bank has revised down its view of how fast the economy is growing right now, to an annual rate of 2.5 per cent from 3 per cent last month.
And the growth outlook has softened as well, given the sharp fall in dairy prices and the fact the Canterbury rebuild appears to have peaked.
Bank of New Zealand economist Craig Ebert said 2.5 per cent was more like the view BNZ had long had for calendar 2015.
"While there are downside risks to this, and poor prognoses for some sectors, we still come up with GDP growth of just above 2 per cent for this year and next," Ebert said.
The Reserve Bank expects inflation to be close to 2 per cent by early next year, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure.
Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell.
That is despite the fact that non-tradables inflation is running at its weakest rate for 14 years and, like other forecasters, the bank is uncertain how quickly the lower exchange rate will feed through into higher consumer prices.
ASB chief economist Nick Tuffley said: "We have been grappling with this relationship ourselves, and have recently toned down our own pass-through assumption of the New Zealand dollar to inflation.
"The Reserve Bank's wording suggested it was very wary of the downside risks to inflation should the exchange rate pass-through be more limited than expected," Tuffley said.
"Given the competitive retail environment and subdued domestic inflation pressures, there is a strong and growing risk inflation does not return to the mid-point of the inflation target band in the bank's medium-term time frame."
In any case the kiwi has evidently not fallen enough for the bank's liking.
"Further depreciation is necessary given the weakness in export commodity prices," Wheeler said.
Tuffley said that indicated the Reserve Bank's key assessment of the level of the Kiwi dollar was relative to commodity prices.
Wheeler said that while Auckland house prices continued to rise rapidly, outside Auckland house price inflation generally remained low.
"Increased building activity is under way in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected," he said.
Wholesale interest rates rose slightly after the announcement, two-year rates by 5 basis points.
"Still, overall, wholesale rates have fallen markedly over the last month or two," Ebert said.
This was allowing banks to trim mortgage rates to the point that many fixed-term rates were now lower than they were during the depths of the global financial crisis.
"So, easily the lowest in a generation, if not two," Ebert said.
"It's part of what's shunting house prices to levels unjustified by economic fundamentals. And not just in Auckland.
