A weaker outlook for medium-term inflation, risks to global growth and liquidity, and proposed capital changes for New Zealand banks could lead the Reserve Bank to cut rates three times between now and 2020, ANZ Bank says.
The official cash rate is currently at 1.75 percent and the central bank’s latest forecast in November signalled a quarter-point rate hike by December 2020. At the time, however, governor Adrian Orr reiterated a rate cut was not out of the question.
“We have changed our OCR call,” ANZ’s New Zealand chief economist Sharon Zollner said. “We are now forecasting a 25 bp [basis point] cut in the Official Cash Rate in November 2019, with a further 50 bps of cuts to come over 2020, taking the OCR to 1 percent.”
ANZ has penciled in the 2020 cuts for February and March.
The move comes just after Statistics New Zealand reported the economy grew 0.3 percent in the third quarter, half the 0.6 percent increase expected.
“The RBNZ is likely to conclude that economic momentum is insufficient to deliver inflation sustainably at the midpoint,” Zollner said.
The central bank is mandated to keep inflation between 1 percent and 3 percent, with a focus on the midpoint. Annual inflation was 1.9 percent in the September quarter.
Zollner also points to risks in the global economy where “it is becoming patently clear that global growth is stalling”.
Lending costs are rising globally as central banks end stimulus programmes, while proposed changes to bank capital requirements here will also have an impact.
Last week the central bank said it wants local lenders to hold more higher-quality capital on their books to help fund their credit, rather than using borrowed money. It also plans to limit the big four banks’ internal models that have led to lower capital requirements, giving them a competitive advantage over the minnow lenders which have to use the standardised approach.
According to the consultation paper, the Reserve Bank wants to set a tier 1 capital requirement, including a 9-10 percent capital buffer, equal to 16 percent of a lender’s risk-weighted assets for the big four banks and 15 percent for all other lenders. The current requirement is for a 6 percent minimum plus a 2.5 percent buffer.
“This would impact both the price and the availability of credit to the broader economy,” Zollner says. “It therefore implies a lower long-run neutral OCR, but also an even lower OCR over the transition period, while banks are building their buffers.”
She says there are risks around the timing of the first cut, noting it could be brought forward should the global environment deteriorate more quickly, or domestic growth or inflation indicators turn softer.
“While the timing may be uncertain, and the path to a cut not necessarily be a straight one, we simply find it extremely difficult to envisage an OCR hike over the next couple of years, with the global growth cycle turning,” she says.