Westpac expects the Reserve Bank (RBNZ) will cut the Official Cash Rate (OCR) at least twice before the end of the year if the labour market gets any weaker.
Westpac expects the RBNZ to cut the OCR at least twice before the end of 2019 if economic conditions get any worse. Photo: RNZ / Alexander Robertson
The bank had previously forecast only one further cut the OCR in August because of a gloomier global economic outlook, but now expected cuts in August to 1.25 percent and another in November to 1 percent.
Westpac chief economist Dominick Stephens said there was an outside chance the central bank would bring forward the second cut to September if the labour market showed signs of weakening.
"We previously expected that the economy would be picking up by mid-2019, on the back of fiscal stimulus and lower interest rates," he said in a research note.
"Instead, recent data suggests that New Zealand economic growth has remained slow."
The RBNZ has a responsibility to maximise employment as well as keeping inflation steady at about 2 percent.
New employment and wages numbers are due next week for the three months ended June. The unemployment rate currently stands at 4.2 percent.
Mr Stephens said the New Zealand economy had been slowing for two years but had been expected to start picking-up by now.
He said the domestic economy was more sluggish than anticipated with low business confidence translating into slower hiring, while the recent downturn in forestry could cause job losses.
"To cap it all off, the trade-weighted exchange rate has risen about 3 percent over the past month, and is now about 1.5 percent higher than the forecast that underpinned the RBNZ's May OCR decision."
The RBNZ cut the cash rate for the first time in more than two years in May and signalled its next move is likely to be another cut.
Mr Stephens said a rate cut would likely stimulate the housing market, which would in turn stimulate consumer spending.
"On top of that, we are still expecting the large doses of government spending that have been administered over the past two budgets to stimulate the economy," he said adding that it was just a matter of time before the stimulus took effect.
Longer-term, he said the economy was likely to begin to pick up and he expected the Reserve Bank would begin to signal increases to the OCR in the coming year with increases from mid-2021.