Bank tips Reserve Bank to start slashing OCR

Reserve Bank Governor Graeme Wheeler has built a good record of clear and accurate communication regarding future OCR changes. Photo / Mark Mitchell

Following another drop in export dairy prices overnight ASB economists are now predicting the Reserve Bank will reverse all of last year's increases to the official cash rate.

A deteriorating outlook for the terms of trade and national income was the principal reason the central bank cited for cutting the OCR by 25 basis points to 3.25 per cent last month and foreshadowing another cut beyond that.

Following weaker than expected economic growth numbers for the March quarter market economists have tended to regard another OCR cut this month as in the bag and further easing beyond that increasingly likely.

ASB chief economist Nick Tuffley said today he now expects the Reserve Bank to cut the OCR a further 75 basis points in the July, September and October reviews, to a low of 2.5 per cent.

Tuffley cited weakening business confidence, weakening consumer confidence in dairying regions, the weak overnight dairy auction and ASB's expectation that recovery in dairy prices will be slower.

But there were some uncertainties around when or if the last cut would be delivered, Tuffley said.

"The New Zealand dollar has already fallen substantially, and will also help prop up the economy and inflation. And, low interest rates are already fuelling the housing market."

Further interest rate cuts would further stoke the housing market and add to the Reserve Bank's macro-prudential concerns about it, he said.

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Deutsche Bank chief economist Darren Gibbs said on Tuesday that over coming months the Reserve Bank was likely to conclude that it was prudent to unwind all of the monetary policy tightening undertaken in 2014, taking the OCR back to 2.5 per cent.

ANZ is calling for two more OCR cuts with a risk of more, while Westpac is picking cuts in both July and September.