OCR to stay put - NZIER

An interest rate cut would throw more fuel on to the fire of the Auckland housing market - which has left the RBNZ in a bind, the NZIER said in its June Quarterly Predictions report.

The New Zealand economy has stayed solid and is experiencing a broadening recovery, amidst global wobbles, states the NZIER.

But it sees storm clouds ahead.

These include the dairy price drop, the Canterbury rebuild nearing its peak, an uncertain global outlook and the Auckland housing market – which will only experience dampened demand at the margins in response to recent RBNZ and government measures.

“There is almost no general inflation pressure in the New Zealand economy,” the NZIER said.

“Imported deflation and price-sensitive consumers are maintaining a lid on prices.

"We expect inflation to stay below the middle of the Reserve Bank’s target band well into 2017.”

This situation would ordinarily warrant an interest rate cut but, thanks to Auckland’s housing market, the RBNZ can’t afford to do that, the NZIER said.

“We can see no alternative other than to hold rates steady until mid-2017.”

This view puts the NZIER at odds with many of the major bank economists who have been predicting an OCR cut later this year.

For example, ANZ chief economist Cameron Bagrie believes that low inflation and a deteriorating risk profile across the economy looks set to be matched by a lower OCR.

Uncertainty surrounds the precise impact of the RBNZ and government moves to tackle Auckland housing demand, but the effect is could be stark given the extent of Auckland house price movements recently, he said

“At a time of other challenges (dairy) and low inflation, it reinforces our view that the OCR is heading lower, and sooner rather than later.”

ASB, Westpac and Deutsche Bank have also all predicted OCR cuts this year.