Business

Economist tips 2 percent OCR

16:12 pm on 28 January 2016

Increased uncertainty about the strength of the global economy and ongoing low inflation is mirrored in economists' expectations about the Reserve Bank's next move.

Reserve Bank Governor Graeme Wheeler Photo: RNZ

Central bank governor Graeme Wheeler kept the Official Cash Rate (OCR) on hold at a record low 2.5 percent but signalled it could be cut further if needed.

Some economists say it's not a question of if Mr Wheeler cuts, but when.

Westpac chief economist Dominick Stephens has long argued the Reserve Bank will cut rates to 2 percent.

Mr Stephens said Fonterra's decision to cut the dairy payout to its farmers to $4.15 a kilo of milk solids, means such a cut could be as early as March.

"There's a very good chance that the Reserve Bank could cut in March. We're just mulling the likely timing now. I certainly think export commodity prices falling for New Zealand lifts the chances of a March cut.

But Mr Stephens said where inflation expectations headed would be the key to the central bank's next move.

The Reserve Bank's quarterly survey showed respondents believed inflation will be about 2 percent in two years time, in line with the mid-point target.

"If that changes, I think it becomes a slam dunk. The Reserve Bank is pretty much required to reduce the OCR if inflation expectations fall."

But other analysts argued the hurdle to cut the OCR was high, despite the increased easing bias.

ANZ Bank chief economist Cameron Bagrie said growth was solid, core inflation was 1.6 percent, the dollar was falling and house price pressures, particularly in the top half of the North Island, remained elevated.

" his doesn't sound like a central bank ready to cut rates any time soon."

Mr Bagrie said it had its own watchlist of six Cs - China, currency, commodity prices, cost of funds, credit growth and confidence.

While some of these - such as the cost of fund increases and low export prices - could justify a lower OCR now, "we are not seeing enough across the board, particularly with the domestic economy still performing well, to justify a material further easing in policy".