HSBC predicts OCR cuts

The bank’s economists previously expected the Reserve Bank to hold the cash rate this year and then hike it in 2016.

However, they now think the RBNZ will cut its cash rate to 3.0% by the end of 2015 – with the first cut most likely to come this month.

HSBC chief economist Paul Bloxham said falling business confidence, weaker global conditions, very low inflation and the recent tightening of macro-prudential settings has opened the door for the RBNZ to cut rates.

He pointed out the RBNZ has stated that evidence of “weakening demand and domestic inflationary pressures” would see it consider a cut.

Some evidence has now arrived, he said.

“For some time now, we have argued that the main driver of New Zealand's low inflation has been strong supply, which has been sufficient to meet on-going strong demand, keeping prices contained.”

While demand remained strong, HSBC thought the RBNZ would hold rates steady, rather than cut to support demand, Bloxham said.

“Plus, the on-going housing price boom in Auckland, with prices up 17% year-on-year, could constrain the RBNZ from cutting for fear of a potential housing market bubble.”

But recently there has been some significant changes.

These include the RBNZ’s measures targeting the Auckland housing market and the government’s new tax measures for investor properties.

Further, Bloxham said there are now signs that demand may be turning down, with a key survey showing a sharp fall in business confidence and the outlook for activity.

The global backdrop has also become less favourable, with China's growth slowing and US data looking weaker, he continued.

“While one of these factors alone may have left us comfortable with the RBNZ staying on hold in 2015 and lifting rates in 2016, the combination of them shifts the risks in favour of cuts. We now expect the cash rate to be cut to 3.0% by end-2015 and held steady through 2016.”

The timing of the cuts is uncertain though, Bloxham said.

“They could wait for the Q2 CPI (due on 16 July) before cutting in late July, or cut in June. We slightly favour a June cut and we expect another cut to 3.0% in Q4.”