VIEW: Being Non-Negative

ASB note that they have changed their "outlook for the OCR. We no longer expect further OCR cuts in the new year, but that's conditional on the Funding for Lending Programme (FLP) being effective in lowering interest rates in the economy. The economy still needs stimulus, but the FLP may now be enough. Our previous forecast of a 75bp OCR cut in April to -0.5% looks too big and too soon. News of late shows the NZ economy has held up surprisingly well in the near term. The household sector, in particular, is on a tear. We still have question marks about how long this momentum can be sustained and how much is a short-term sugar rush. However, it is clear that fiscal and monetary stimulus is already having a marked effect. And development of an effective vaccine is a strong signal that – eventually – borders will indeed open up and economically-damaging social distancing restrictions can be eased. The risks are still skewed towards a lower OCR than the current 0.25%. If the FLP turns out to be a damp squib, then the RBNZ may need to resort to cutting the OCR to get the desired impact on bank lending rates. Furthermore, there is still a lot that can go wrong yet, such as a serious community outbreak in NZ or risk of more marked global economic impacts from the current renewed wave of COVID infections in Europe and the US. And, vaccine hopes could end up being dashed. But for now, we expect the RBNZ will implement the FLP, and reassess developments next year. The effectiveness of the FLP in lowering NZ interest rates, the extent to which the current household-led uptick can sustain itself, how comfortable the RBNZ is with managing any financial stability risks from the booming housing market will all matter for whether the RBNZ sees the need to cut the OCR any further."