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RBNZ OCR Forecast Update: Enough is enough


  • “We now expect the OCR to remain on hold for the foreseeable future (previously we expected two cuts this year)”.

  • “Recent strong GDP and housing data suggests that the OCR is now low enough.”

Westpac now expects the RBNZ to keep the OCR on hold for the foreseeable future (a change from their call for two cuts this year). The bank maintains that the RBNZ needs to keep the OCR very low due to low inflation and high unemployment, but gives three reasons as to why it does not need to go any lower;

“(1) The economy has weathered the Covid storm better than anticipated, and GDP has already recovered to its pre-Covid level. True, very recent indicators suggest that GDP growth in the December 2020 and March 2021 quarters will be very low or even negative, mainly because of the lack of international tourists over the normally-busy summer months. But even if GDP does decline over summer, the economy will still be operating at a far healthier level than previously anticipated.”

“(2) The housing market has outstripped even our very bullish expectations. We now predict that annual house price inflation will peak at 20% later this year (previously 16%). And looking at 2021 as a whole, we are now forecasting that house prices will rise 15%, on top of the 12% increase over 2020. The reason for this surge in prices is the sudden drop in mortgage rates engineered by the RBNZ.”

“(3) Global supply and distribution of goods has been disrupted by Covid-19. Supply shortages could temporarily boost inflation in New Zealand. On a related note, global oil prices have risen in recent months, along with prices for other key global commodities – again, this could help to boost inflation in New Zealand.”

In terms of exchange rates, the bank says; “to date, we have been forecasting that the NZD/AUD exchange rate would fall this year, and that the NZD would rise only a little against the USD, in an environment where most currencies are expected to rise against the USD. However, given that we are no longer expecting OCR cuts, we now see more scope for the NZD to rise.”


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